The Militant(logo) 
    Vol.63/No.3           January 25, 1999 
 
 
Brazil Devaluation Threatens Wider Crisis  

BY NAOMI CRAINE
The head of the Central Bank of Brazil, Gustavo Franco, resigned January 13. His successor, Francisco Lopes, immediately devalued the Brazilian currency, the real, by nearly 8 percent against the U.S. dollar. The Sao Paulo stock exchange dropped 10 percent within minutes, and the Dow Jones Industrial Average in New York fell 250 points in half an hour, though it regained half of that by the day's end. Other stock markets sank across Europe and Latin America.

Washington and the International Monetary Fund (IMF) have been trying to stave off a devaluation of the real through a $41.5 billion "rescue package" cobbled together last November. The loans and "loan guarantees" from the U.S. government, some 20 other governments, and the IMF are also aimed at ensuring the Brazilian government can continue making debt payments to Wall Street and other imperialist creditors.

The package, made up mostly of short-term loans at premium interest rates, is similar to the "bailouts" of the Mexican peso in 1995 and in several Asian countries over the last 18 months, except that it came prior to the devaluation. Those deals have in fact deepened the debt-slavery of the supposed beneficiaries, and accelerated the sell-off of the national patrimony of semicolonial countries to imperialist interests.

Days before the devaluation of the real, anticipating the possibilities for an imperialist buying spree, Chase Manhattan announced plans to buy a Sao Paulo investment bank that would allow the U.S. banking giant to arrange acquisitions of Brazilian companies.

Whatever "rescue" schemes Washington and other imperialist powers may now try to impose on Brazil will above all target working people, who already face rising unemployment, staggering interest rates, and government attempts to impose austerity measures.

What's happening to the toilers in Brazil now is not exceptional. It is just one variant of the future facing every country held in economic bondage to world finance capital. It is also further confirmation that within the imperialist system none of the "emerging markets" will ever emerge into the ranks of the developed capitalist countries. The potential rebellion by working people to these realities of capitalism is the worst nightmare of the bankers and businessmen of Wall Street and beyond.

The capitalist rulers fear the spiraling economic crisis in Brazil will trigger a much broader crisis in Latin America. Brazil has the largest population - 165 million - and the largest economy of the countries in South America.

A financial collapse affecting Latin America would have a much greater impact on the U.S. economy than the crisis that has been devastating the semicolonial countries in Asia since July 1997. Some 20 percent of U.S. exports are to Latin America, about half of those to Mexico. Devaluations in other major countries in the region, particularly Mexico, would make these goods much more expensive and rapidly cut down this trade.

The economic situation in Mexico was looking less stable before the devaluation of the real. The annual inflation rate had risen to 18.7 percent by the end of 1998, up from less than 15 percent earlier in the year. Wages are not rising at the same pace, and the government just lifted price controls on tortillas, a main food staple. The Mexican peso, which lost 12 percent of its value against the U.S. dollar last year, fell another 3.6 percent to a historic low in the wake of the devaluation of the real.

The crisis in Brazil is likely to hit the economy of Argentina, Brazil's largest trading partner, particularly hard. The Buenos Aires stock market plunged more than 10 percent January 13, the steepest drop in Latin America. Argentine economic planning secretary Rogelio Frigerio vowed to defend the fixed exchange rate of one Argentine peso to the U.S. dollar, though this will mean soaring interest rates, a drop in exports, and a sharp rise in unemployment, which is already 12 percent.

Some 2,000 U.S. businesses operate directly in Brazil. Auto giants Ford and General Motors both have factories there, as do IBM, Coca Cola, and other major corporations. U.S. banks have some $27 billion at stake. Brazil comprises about 45 percent of Latin America's economic output.

Brazilian president Fernando Enrique Cardoso sought to reassure investors that the devaluation would not lead to a default on the foreign debt. "The government will honor all its domestic and foreign contracts, always, because that is the basis of reliability," he declared. "Rules are made to be followed."

But Cardoso has run into difficulty pushing through the austerity measures laid out in the terms for the $41.5 billion loan package. These conditions, which include cuts to social programs and the social security system, as well as tax increases affecting millions of workers, have still not been approved by the national legislature.

Unemployment officially stands at 7.3 percent, and is as high as 19 percent in Sao Paulo, Brazil's largest and most industrialized city. These numbers are expected to rise. Workers have been resisting layoffs by Ford and other companies (see page 2), and landless peasants and rural workers are continuing land occupations.

Cardoso's latest political setback came January 6, when the newly elected governor of the state of Minas Gerais, Itamar Franco, announced a 90-day moratorium on payments on the state government debt to the federal government. This triggered a rapid drop in the stock market, and spurred imperialist investors to pull funds out of the country. This capital flight reached $1.2 billion January 12, the day before the devaluation.

U.S. treasury secretary Robert Rubin responded to the turmoil January 13 by urging, "Brazil can carry forward the implementation of a strong, credible economic program." In other words, the IMF's austerity plan.

The day before, Rubin had listed the situation in Brazil as one of his main concerns about the world economy. He refused to discuss what Washington would do if the "bailout" began to unravel.

 
 
 
Front page (for this issue) | Home | Text-version home