LEXIS®-NEXIS® Academic Universe

LEXIS(R)-NEXIS(R)

Document 52 of 68.

View Related Topics

January 14, 1999, Thursday, Late Edition - Final

SECTION: Section A; Page 1; Column 5; Business/Financial Desk

LENGTH: 1313 words

HEADLINE: TURMOIL IN BRAZIL: THE U.S. ROLE;
As an Economy Sinks, U.S. Sees Painful Choices

BYLINE: By DAVID E. SANGER

DATELINE: WASHINGTON, Jan. 13

BODY:
When President Clinton and Treasury Secretary Robert E. Rubin announced two months ago what they termed a "precautionary" $41.5 billion aid package for Brazil, they described it as the first test of a new strategy to help countries reform their economies before being overwhelmed by the tumultuous global market forces that have swept from Asia to Russia to Latin America.

In return, the Brazilians said they would curb free-spending ways -- they signed an accord declaring that their Government was "fully committed" to maintaining the system for managing the value of its currency. Only by slowly decreasing the value of the real, the thinking went, could Brazil keep itself and the rest of Latin America from descending into a nasty recession.

But now, after watching billions continue to pour out of the country after their legislature balked at many of the toughest changes, the Brazilians have allowed their currency to fall more than 8 percent.

Many suspect it is the first of a series of devaluations that could resonate around the Americas, and perhaps around the world. And it confronts Mr. Clinton, Mr. Rubin and the International Monetary Fund with a painful choice: whether to continue pumping aid into a country that seems reluctant to change, or whether to stand back, even if that means risking a reignition of the economic turmoil that followed Russia's economic crisis last summer.

In statements today, neither Mr. Clinton nor Mr. Rubin tipped his hand -- or promised much more help. "It is important that Brazil carry forward the implementation of a strong, credible economic program," Mr. Rubin said in a statement. In private, other Administration officials predicted that Brazil's problems would not trigger another selloff around the world, the way panicked investors and lenders fled from developing nations five months ago. The world economy is less brittle now, they said, and investors are a lot better prepared and more savvy than they were five months ago.

But the reality, one senior Administration official said this afternoon, is that "none of us really know."

"It's a breach of the fire wall that we spent months building around Brazil," said another official, one of the President's top economic advisers. "It's hard to overestimate the anger around here about how the Brazilians wasted time when they needed to deal with their problems."

The fire wall was the $41.5 billion "precautionary" aid program for Brazil, a figure that included a $5 billion direct contribution from the United States. The idea was to buy some time for the Brazilians, to enable Brazil to keep its economy together, and its currency strong, while the Government implemented a detailed economic plan negotiated with the I.M.F.

But from the start, the Administration knew that it was also building a fire wall for itself. Brazil is one of America's largest trading partners, a far larger market for American corporations than any Asian nation except Japan. A deep recession there, it was feared, could trigger big trouble in Argentina and Mexico, and it would be felt in the United States far more sharply than last year's crisis in Southeast Asia, where American firms are less exposed.

For Mr. Clinton and Mr. Rubin, the fire wall was also the first test of a new strategy for coping with global economic instability.

Their idea was to aid countries before they got into deep trouble, the kind of trouble that wreaked havoc on the economies of South Korea, Indonesia, Thailand and Russia. "It is far better to help a country when it is still fundamentally healthy," Mr. Rubin said last fall, "and when it is easier to make the necessary economic reforms."

But the strategy hinged on the willingness of Brazil's unpredictable legislature to enact that reform program -- including sharp and politically unpopular budget cuts that began to strip away many of the government-provided benefits that Brazilians had come to expect, but which their country could no longer afford.

The legislature balked at many of the cuts. And ever since, unconvinced that President Fernando Henrique Cardoso had the political power to push through the rest of the package, investors have continued to flee the country.

The slow flight to the exits turned into a rush on Tuesday, when $1.2 billion fled the country. The immediate cause was a challenge to Mr. Cardoso from a tempestuous former President of Brazil, Itamar Franco, now Governor of the state of Minas Gerais. Mr. Franco said he would refuse to pay the state's debts to the Federal Government, claiming his coffers had been emptied by the economic downturn that has swept the country. If he paid the cash, he said, there would be little left for food, or salaries for state workers, or other social programs. Investors concluded, rightly or wrongly, that Mr. Cardoso was not firmly in control.

It was the kind of unpredictable event that has recurred time and again in the world financial crisis -- a clash between the demands of global investors who are looking for discipline and austerity, and political reality in countries that are tired of being told by Washington or the I.M.F. how to run their economies.

"This calls into question the whole efficacy of the American strategy," said Clyde Prestowitz, the president of the Economic Strategy Institute, and a former Commerce Department official. "The whole assumption of the Administration's approach is that we are going to aid countries that are committed to getting their act together. But if it's a big or important country -- Russia because of its nuclear power, Brazil because of its economic power -- there is a temptation to simply hope that they will get their act together. And the Brazilians didn't do it."

There are three big risks ahead.

The first is that Brazil will sink into an even deeper recession than the one it has been facing for months. To defend the currency at its newly devalued level, Brazil will likely have to keep interest rates extremely high for the near future. But that, in turn, could choke off economic activity -- at a time that factories are closing and middle-class workers are finding their jobs threatened.

"There is a real risk at this point that this could deteriorate badly," said Robert Hormats, the vice chairman of Goldman, Sachs & Company. "The question is whether they can contain the devaluation and get the reform program moving. Because there really is no Plan B."

The second risk is that contagion will be reignited, at least in the region, perhaps beyond. Because the Latin American economies are so interlinked, many economists were warning today that Argentina and Chile could easily fall into recession. That prospect -- and the social unrest it could engender -- was clearly on the mind of President Carlos Saul Menem of Argentina, during his visit this week to Washington.

"You could see the tension on their faces," said one Administration official who met with Mr. Menem and his advisers.

And finally there is the challenge to American credibility. After the failure of the rescue plan in Russia, Mr. Rubin and Mr. Clinton have a lot riding on their bet in Brazil. In November, with the Dow still down and nervousness about global economic trouble still fresh, Congress said not a word about putting $5 billion in American funds at risk.

But today Jim Saxton, a Republican from New Jersey who chairs the House Joint Economic Committee, called the "precautionary" package a "costly, counterproductive failure."

Mr. Rubin's view is, predictably, quite different. "I start from the view that the Brazilian program should work," he said Tuesday afternoon, as rumors of the devaluation were beginning to swirl. "It was a good program that was announced. Cardoso is deeply committed to getting this done."

But, he added, "The politics obviously are the key."

LANGUAGE: ENGLISH

LOAD-DATE: January 14, 1999