Brazil 2
Brazil 2On January 12, 1999, over a billion dollars fled Brazil. Three days later, the Central Bank attempted to bring about a limited devaluation of the Brazilian currency, the real, but it failed to prevent a free fall. Over the next two days, another $3 billion was pulled out, and by the end of the month, the real had lost over 40 percent of its value. The Central Bank president resigned, his successor lasted a week, and as speculative attacks continued, President Fernando Henrique Cardoso, in some desperation, sought out one of international financier George Soros's closest associates, Arminio Fraga, for the job. Fraga used to manage a fund that took bets on macroeconomic changes, such as currency devaluations in places like Brazil. It was, as the Brazilian press pointed out, a case of putting the fox among the chickens.
The outlook for 1999 is grim. Brazil is facing a deep recession and a return of inflation; continuing volatility in the value of its currency; a political cat fight over fiscal reform legislation in Congress; acute stress in the relationship between the federal government and the states; the risk of defaults on state and federal government debt as well as in the private sector; and astronomic and unsustainable interest rates.
For Brazil's partners in Mercosurthe common market that joins Argentina, Paraguay, Uruguay, and Brazil-its plunge into recession and the quantum leap in the price of their own exports in the Brazilian market (especially for Argentina, which has locked its own currency into a one-to-one relationship with the U.S. dollar by means of a currency board) has put enormous strains on the fledgling trade bloc. Other Latin American governments worried that investors would not differentiate between Brazil and the rest of the region, slowing down access to the foreign capital needed to meet their own borrowing requirements. The rest of the world grew fearful of "contagion." For the International Monetary Fund (IMF) and the U.S. Treasury (and ultimately the American taxpayer), which gambled in November 1998 that a huge $41.5 billion package of multilateral assistance for Brazil would sustain the value of the real, the realization began to sink in that, as with Russia, good money might well have been dropped once again into yet another bottomless pit.
The Fall from Grace
How did Brazil get into this sorry state? Who or what was to blame? The fall from grace was dramatic, to say the least. Only a year before, this vast South American nation of 167 million people, with the world's eighth largest economy, had seemed firmly set on the path to a more prosperous, modern, and even equitable future. It was led by a polyglot, internationally minded leader of high intelligence who was hailed in European capitals and in Washington as the archetype of the new Latin American leader who would pull the region firmly into the new world envisioned by the "Washington consensus"-a world of free trade, open markets, privatized state corporations, and...
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