Brazil's newly announced austerity measures have won the favor of the International Monetary Fund and a new agreement will be signed Monday to continue loans to stave off bankruptcy, a senior Brazilian government official said last night.
On Wednesday, Brazilian President Joao Figueiredo announced a new set of stern economic measures designed to reduce its rampant inflation rate and the government's need to borrow.
Brazil hoped the new economic controls would convince the IMF and Brazil's major commercial bank lenders to release $1.1 billion in loan payments that have been withheld from Brazil since May 31.
Most of the proceeds from those loans were to be used to repay maturing Brazilian debts.
The IMF has been unsatisfied with austerity steps Brazil took last winter because they failed to reduce the nation's deficit, even though worsening its recession.
Figueiredo had resisted taking additional stringent measures to satisfy the IMF because of mounting social and labor unrest in the debt-laden Latin American nation.
But Monday, in an attempt to pressure the Brazilian government, the Bank for International Settlements (BIS) said it would not give Brazil another extension on a $400 million loan repayment that falls due today. When the IMF and the banks cut off Brazil on May 31, the BIS extended the payment date first to June 30 and then to July 15.
The threat that the BIS might throw Brazil into default--considered an unlikely possibility by both U.S. officials and commercial bankers--apparently helped convince Figueiredo and his cabinet to attempt to satisfy the IMF.
As part of the new program, Figueiredo announced that wages no longer would be fully adjusted to cover inflation, which is now running at an annual rate close to 130 percent. Wages will be increased to cover only 80 percent of the rise in the cost of living. Brazil also put controls on rents, mortgage payments and short-term interest rates.
As meetings between Brazilian economic ministers and the IMF took place in the presidential palace, spokesman Alberto Homsi told reporters: "The accord will be signed Monday. Meetings will continue tomorrow and Saturday at a technical level to define the bases of the agreement."
Federal Reserve Board chairman Paul A. Volcker told a Senate Committee yesterday that because of those steps he is "optimistic" that Brazil's problems "can be managed."
Meanwhile, Mexico has begun to tap a $1.1 billion commercial bank loan payment that it could have drawn May 31, sources in Mexico and the United States said yesterday.
While Brazil was denied loan payments because it was not in compliance with IMF terms, Mexico had so much cash on May 31 that it could defer borrowing $1.1 billion for six weeks, saving itself about $16 million in interest payments.
But Mexico is supposed to repay the BIS $1.8 billion next month and will need all of the bank loans and more to do that, a Mexican official said. He noted that if Mexico did not take the money by Aug. 15, it would have lost all rights to it.
Because of a severe recession, Mexico's imports fell sharply and the country ran a bigger than expected trade surplus in the first six months of the year. Lower than anticipated interest rates also helped Mexico conserve its cash. But recent increases in short-term rates in the United States threaten to raise the rates on Mexico's loans.