U.S.-based Moody’s Investor Service announced August 13 that it had downgraded the debt rating of Brazil, the largest economy in Latin America and home to 170 million people. The downgrade increased speculation among big-business commentators that the government may, like its counterpart in Argentina, be forced to default on interest payments on its colossal national debt.

The IMF decision, announced August 8, had sparked a short-lived rally of the country’s beleaguered currency. In a couple of days the real climbed about 2 percent against the U.S. dollar, briefly reversing its weeks-long decline. The country’s Bovespa stock price index also rose, as did the share prices of U.S. and European banks and corporations holding loans or investments in Brazil’s economy. "Markets Make Merry Over Brazil--for Now," read the headline in the August 9 Wall Street Journal.

The IMF $30 billion package slightly exceeded the $25 billion U.S. banks such as J.P. Morgan Chase, FleetBoston, and Citicorp have loaned to Brazil. As a result, FleetBoston’s stock price was lifted 7.8 percent on the news of the pact.

By August 13, however, the real had fallen back more than 8 percent from its spurt, gains in the price of the government’s foreign currency bonds had been wiped out, and reports of the first roll-on effects in North America, Asia, and Europe were beginning to come in.

In their announcement, Moody’s downgraded a range of key government bonds by a full notch, effectively passing a negative verdict on the reliability of loans and investments in the country. The decision puts Brazil on a par with crisis-wracked countries like Nicaragua and Venezuela. The agency also commented on the IMF package, noting its "backloaded and conditional nature."

Only $6 billion of the IMF money has been promised for this year. The rest will come due after the presidential elections, and "will be delivered only if the new president sticks to the plan after taking office in January," reported the Journal.

The "plan" includes an annual budget surplus of almost 4 percent of the country’s gross domestic product, only achievable with ongoing cuts in government spending that will deeply impact millions of working people.  
 
Fear about election
"The IMF loan is structured to induce the...presidential front-runners, Luiz Inácio da Silva and Ciro Gomes, to continue the conservative economic policies of the outgoing president, Fernando Henrique Cardoso," continued the New-York based voice of big business. The two candidates score 34 percent and 29 percent in public opinion polls, well above the ruling party’s candidate.

Da Silva or "Lula," the candidate of the Workers Party, who leads the opinion polls, has described the IMF agreement as "inevitable." While criticizing "the errors committed by the government in the last eight years," da Silva said that the loan package "allows the markets to calm, and with that, gives a chance for the country to return to growth if the right measures are taken."

In spite of such reassurances, the big capitalists in both Brazil and overseas continue to express trepidation about the election, fearing the growing instability and the increased expectations among workers and peasants that would accompany defeat for the governing party and success for da Silva.

Investors are "spooked by Brazil’s dynamics on its $250 billion debt pile and the prospect of a leftist president in 2003," wrote David Chance in an August 13 Reuters dispatch.

"The underlying reason" for Moody’s verdict, said economist David Lubin to Chance, "must be that the market has decided that the IMF deal lacks credibility." It is "conceivable," he said, "that $30 billion is insufficient to stave off a deeper problem."

The IMF package enabled a number of foreign investors to "ease their exit" from their Brazilian "risks," observed Chance. Before the brief rally dissolved, the Journal quoted a foreign relations pundit who said, "I think the IMF accord has resolved the problem for the banks and the financial sector, but it doesn’t resolve the real problems for Brazil."

"Who, exactly, is being bailed out?" asked New York Times columnist Paul Krugman, who nevertheless endorsed the IMF package.

A default in Brazil would be "a big problem for the rest of the world," wrote Robert Samuelson in the Washington Post. "It would also hurt the rest of Latin America--already reeling from Argentina’s default and turmoil in Colombia and Venezuela."  
 
 
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