 |
|
 |
|
 |
|
 |
|||||||||||||||||||||
|
Brazil faces several challenges: a heavy, short-term debt burden; a weak economy; and an October election in which none of the candidates or teams are perceived to be as strong as the current leadership. Other near-term worries include the bunching of private sector external debt rollovers, rising demand for dollars as the Real weakens, and Argentina's continuing deterioration.
If Brazil is to grow its way out of its debt burden, it will have to make substantial changes in its economic program. The current program is based on IMF-style austerity, which means high interest rates, a floating (or sinking) exchange rate, and high tax rates. This is the same anti-growth approach which has dragged down dozens of developing countries. In contrast, a growth-oriented economic program for Brazil would be built on currency stability, lower interest rates, lower tax rates, and trade liberalization. Under this type of program, Brazil would be able to grow fast enough to meet its debt payments, attract a capital inflow, and gradually lengthen its debt maturities. Brazil's economic team did announce a series of measures on June 13 designed to stabilize the Real and settle the markets. Among the measures, Brazil announced it will utilize its $10 billion credit line with the IMF. But while financial markets initially reacted positively to the news, they gave up their gains later in the day. Local interest rates remained high. Monetary developments over the next week will be very important in calming the markets for the medium term. Debt repurchases and sterilized interventions have only temporary impact. An IMF drawdown is only a positive if it is accompanied by a pro-growth change in the economic program — one that would include an effort to stabilize the exchange rate, reduce the excess Reals that are outstanding, and lower the overnight interest rate substantially. While Brazil's continued economic and financial deterioration will not have a major negative impact on the U.S. or U.S. financial markets, it will hurt some individual companies (such as was the case with Argentina's deterioration). Also, some European countries, particularly Spain, France, Portugal, and the Netherlands, will feel some downdraft from Brazil if it continues to deteriorate. So a healthy Brazil is in our better interest. — Mr. Malpass is the Chief International Economist for Bear Stearns.
|
|
|
|
|||||||||||||||||
<% dim printurl
printurl = Request.ServerVariables("URL")%>
razil
remains a point of deep concern. Under its current economic program, it
doesn't appear as if the country will grow enough to support its debt
burden. 
