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Saturday, 5 October, 2002, 16:30 GMT 17:30 UK
Q&A: Brazil's $30bn lifeline

Brazil is being handed $30bn by the International Monetary Fund to help it stay solvent, as many of its Latin American neighbours experience economic meltdown.

BBC News Online examines why such a large sum is needed - and why Brazil should be considered a worthy recipient.

You could snap up the Brazilian football team for that kind of money and still have change to buy the Suez Canal. Why so much?

At the heart of Brazil's problem is a simple turnaround. Under a right-wing president with free-market policies, the country become a magnet for foreign investment during the 1990s.

Now much of that money is being pulled out, over fears that a left-wing candidate will win forthcoming presidential elections.

US Treasury Secretary Paul O'Neill signing dollar bills for children at a play centre
O'Neill has signed off on the IMF loan

The result: Brazil's currency, the real, has been hammered.

And that has spelt trouble for the $250bn or so Brazil owes the outside world. Every time the real drops, debt repayments - denominated in dollars - get more expensive.

The maturities - closing dates, as it were - offered by the big lenders when Brazil tries to refinance have been shortening alarmingly. Almost a third - $80bn or so - is now due for repayment within a year.

So the IMF standby loan, 80% of which will be available as early as next year, effectively gives Brazil elbow room to sort out its debts without facing the risk of a default of the sort which condemned Argentina to penury last year.

Why are investors so scared of a left-wing president?

For some investors, particularly those who have bought government bonds, there's the knotty question of whether a left-wing president would allow Brazil to default on some or all international debts - although many observers feel this worry has been overstated.

Investors also wonder about the potential impact on Brazilian businesses.

Might, say, a privatised water company in Sao Paulo be renationalised by a left-wing regime?

Many privatisations - introduced in part at the IMF's behest - may have made money for investors, but are seen as having little improved services for consumers.

Election contenders in Brazil
Investors are worried about the upcoming election

Rio de Janeiro's electricity company produced healthy profits for the buyers but, having sacked 40% of staff, has experienced trouble maintaining supplies, while costs to the customer have in some cases doubled.

News of the IMF loan, however, has calmed nerves.

So is there a catch to the IMF loan?

There's no new catch - simply Brazil's continued acceptance of the IMF agenda.

Privatisations must continue.

The government's accounts must stay in credit to the tune of 3.75% of total national income. (Given the country's recent performance this condition is not regarded as particularly onerous).

And progress will be reviewed every three months.

In return, as well as the new money - which extends a $15bn line of standby credit due to run out in December - Brazil has received clearance to run down its foreign reserves from $15bn to $5bn.

In effect, another $10bn to spend on shoring up the currency.

Why should Brazil receive this money when Argentina, which is in worse shape, has not received a peso in new IMF support?

For one thing, Argentina's record is much worse than Brazil's.

Dollar futures traders at the Bovespa exchange in Sao Paulo
Traders are easing up on the real thanks to the bailout

Argentina's decision to peg the peso to the US dollar at a time when the dollar was stronger than for decades, while understandable in terms of credibility, priced its exports out of the regional market.

It also meant that when the crash inevitably came, even its citizens' private debts would be dollar denominated and thus would appreciate at an alarming rate.

The other thing is that Argentina's timing was unfortunate.

US President George W Bush came to the White House vowing not to engage in the kind of bailouts that had saved Mexico in the 1990s.

Argentina suffered thanks to that reluctance. But now the instability is spreading to its neighbours - Uruguay, having shut its banks for a week amid street protests, being a prime example - the US has become more conciliatory.

In any case, Brazil is by far the biggest economy south of the US. A failure there would be likely to have broader repercussions.

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Argentina in turmoil


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