New York Times
August 9, 2002
WASHINGTON — To hear the Bush administration tell the story, there is one main reason that Brazil should be rescued with a $30 billion loan while Argentina should get nothing: Brazil has been good; Argentina has been bad.
In explaining their abrupt reversal in deciding to support a huge bailout for Brazil, something that seemed odious to the White House a few weeks ago, administration officials said today that Brazil had earned support because it had moved courageously to open its markets, fight inflation and put its fiscal house in order.
Argentina, by contrast, reacted to its currency crisis by defaulting on most of its public debt, freezing bank accounts and refusing to enact much-needed reforms.
Most international experts would agree with at least part of that analysis. But the American motivations are a good deal more tangled than that.
For one thing, a Brazilian collapse would be much more frightening. Brazil’s economy is several times as big as Argentina’s. Its external debt of $264 billion is more than double that of Argentina, and American banks like Citigroup, FleetBoston and J. P. Morgan Chase have much greater exposure to Brazilian loans than to Argentine ones.
Brazil has also been a big magnet for American industrial investment. General Motors and other car companies have sunk billions into factory expansions, and a Brazilian meltdown would turn those into white elephants.
It is unclear how much American banks and manufacturers lobbied for the Brazilian rescue plan, but they will certainly benefit from it. Shares of Citigroup and FleetBoston jumped 6 percent as soon as the markets opened today, long before the rest of the stock market began soaring to a large increase.
The Bush administration also had political and diplomatic reasons to reverse its prior stance of “tough love” when it came to Brazil.
The I.M.F. loan was carefully structured to affect Brazil’s upcoming elections, in which two left-wing candidates are in the lead and had been threatening to reverse Brazil’s free-market approach to economics and trade.
Most of the loan cannot be tapped until after the elections, and the left-wing candidates strongly implied today that they will continue the current belt-tightening budget policies in order to satisfy the fund.
President Bush’s hope to negotiate a giant free-trade agreement that covers all of Latin America, made possible when Congress gave him negotiation authority last week, would have been crippled if Brazil were forced to default on its debt.
Brazilian leaders had already been balking at calls for a free-trade agreement and would probably have refused to embrace the talks if they had been denied aid.
“This was a case in which ideology ran into the wall of reality,” said Lawrence Meyer, a former governor of the Federal Reserve Board who is now at the Center for Strategic and International Studies in Washington.
The real world reacted exuberantly to the news. Stock markets in Brazil, Chile and even Argentina jumped briskly. Brazil’s battered currency, the real, strengthened nearly 4 percent against the dollar.
The political strategy seemed to pay off as well. Both of the two left-wing challengers in Brazil’s presidential election, Luiz Inácio Lula da Silva of the Workers Party and Ciro Gomes of the Labor Front, said today that they would support the fund’s loan program.
That essentially obliges them to support the current government’s austerity program and keep country’s primary budget surplus — the surplus before including external loan repayments — at 3.75 percent of its gross domestic product.
Supporters of a rescue package for Brazil said the government under President Fernando Henrique Cardoso deserves credit for pursuing bold economic reforms. The central bank’s hard-nose monetary policies have brought down Brazilian inflation to some of the lowest levels in its history. The government’s budget position is much stronger than before. And its banking system is one of the strongest in Latin America.
“Brazilian economic policy has been brilliant,” said Nancy Birdsall, president of the Center for Global Development, a policy research group in Washington that focuses on economic issues affecting developing countries. But it was only a few years ago that experts were showering similar praise on Argentina, which is now in disarray. Argentine leaders won praise for privatizing state-owned industry, opening many of its markets and all but eliminating inflation by pegging their currency to the American dollar.
Today, critics complain that Argentina’s spending is out of control because provincial governments run big budget deficits that have undermined the whole country.
But Argentina’s biggest handicap may have been its peg to the dollar, which appreciated by nearly one-third against other major currencies in the second half of the 1990’s. The high dollar harmed Argentina’s exports because it made them far more expensive in many parts of the world.
But Argentina is a far smaller economy with a far smaller impact on other countries. Brazil is the world’s 10th-largest economy, with deep financial ties to the United States as well as its neighbors.
American banks have about $25.6 billion in outstanding to loans to Brazilian borrowers. Citigroup, the biggest American lender to Brazil, has $9.7 billion in Brazilian loans.
Robert H. Rubin, who was Treasury secretary under President Clinton and engineered international rescue packages for Mexico, Russia and many Asian countries, is now a Citigroup director.
A representative for Citigroup could not say whether bank executives had lobbied in favor of a rescue package for Brazil. But other banking leaders have spoken out vocally.
“We think Brazil has earned the benefit of the doubt,” said Charles Dallara, managing director of the Institute of International Finance, an industry association in Washington that represents banks and other financial institutions.
“We have not argued in either Brazil or Argentina that the I.M.F. should step in to protect the banks,” Mr. Dallara said. But he added: “There is a broader systemic case to make for supporting Brazil right now. It is the world’s tenth largest economy.”
Banks are hardly the only institutions with a major stake in Brazil’s health. American car companies have invested heavily in expanding factories in both Brazil and Argentina, and the Brazilian market is the biggest market in Latin America.
“The region has been very unstable there, and that affects our operations there,” said Toni Simonetti, a spokeswoman for General Motors. “We naturally support efforts such as this that stabilize the economy.”