Brazil's creditors hope that this weekend will mark the beginning of a second--and this time successful--phase in dealing with the acute financial crisis in the developing world's most indebted nation.
Last week, Brazil reached tentative agreement with the International Monetary Fund on a new economic program that should enable the international agency and commercial banks to resume lending to the cash-starved nation.
Brazil, $90 billion in debt to foreigners, is now more than $1.5 billion behind in its payments to foreign bankers and suppliers. Those arrears have been piling up during the last 10 weeks of drawn-out negotiations between Brazil and the IMF, since the IMF said Brazil was not sticking to its promised economic program. It put a hold on lending and the bankers followed suit, costing Brazil more than $1 billion so far.
Although international financiers breathed a sigh of relief when Brazil's new agreement with the IMF was announced late Thursday, the nation's problems remain at the top of their list of worries. It may have been Mexico that triggered the Third World debt crisis a year ago this month, but it has been Brazil that has produced the biggest headaches this year.
Bankers now working on a new financing package say Brazil will need another $3 billion to $4 billion of cash this year on top of the sizeable new loans that it is already scheduled to receive. Next year, Brazil will need between $12 billion and $17 billion--at least $6 billion from the banks and the rest from official sources like the IMF and other governnments.
Putting together that much money could take until almost the end of this year, sources say. As one foreign observer commented, the Brazilians "lost the first half of this year and now they are not going to get the money they need until the end of the second half . . . the delay is going to hurt the economy more than was necessary."
The complicated loan package that Brazil arranged with commercial bankers in February began to unravel almost before it was signed, as rebellious regional bankers refused to put up all the money they were asked for. Limping along with less money than it had been promised by foreign bankers, Brazil quickly fell short of the economic goals that it promised the IMF it would meet in return for a $4.9 billion loan.
Now bankers hope the new Brazilian economic program will put that nation's finances back in order.
The bankers are betting a lot on the ability of the military government and its somewhat tired economic team to force through a further round of unpopular austerity measures and stick to them long enough to curb Brazil's appetite for foreign cash, reduce the size of the public sector and its borrowing, and lower the spiraling inflation rate.
The second phase has two different elements. The first is the new economic plan with the IMF. Under the plan, Brazil will promise to cut its public spending and borrowing and to shift away from fully compensating wage and salary earners for the extraordinarily high inflation.
Sticking to such an agreement will be difficult. Last year, Brazil prided itself on being different from the other big debtor nations of Latin America. Unlike Mexico or Argentina, officials would boast, Brazil kept up normal relations with international commercial banks throughout the negotiations over a loan stretch-out and moved swiftly to approve economic measures designed to restore financial stability. But this year Brazilian policy apparently went out of control.
"Absolutely chaotic," was how one foreign diplomat recently described economic policy. The government announced one series of economic measures after another this summer in a scramble to please its creditors and get the money flowing back in. But the country kept failing to deliver the promised changes. The diplomat said that the economic and financial situation was "substantially worse" than he had expected. The political opposition's growing calls for a moratorium on interest and debt payments--"with every headline talking about" it--is "enough to make you nervous," he added.
These calls are not surprising, given the economic pain that Brazil is now going through. In its third year of recession, the economy is now "going into a dive," one economist said. Imports of capital goods were down by 30 percent in the first five months of this year compared with the same period last year, while imports of primary products were running 20 percent below last year. These figures are an indication of the growing weakness in the economy, that will likely hit even harder when real wages are cut under the new salary law.
But a steep recession is part and parcel of the financial strategy for easing Brazil's cash problems. As the economy is squeezed, imports decline and reduce the nation's dependence on foreign cash, the theory goes. Brazil has already surprised most observers with its success in meeting one of its economic goals: a $6 billion trade surplus for this year. In the first seven months of the year, the nation's trade balance was running according to plan because of the sharp declines in imports.
The question, one senior banker said, is whether the Brazilian government has the political will to insist on the new austerity measures that its creditors want. He, and several others, saw the decision to alter the all-important salary laws as a sign that the will is there, and were cheered by the fact that when President Joao Figuereido announced the decision last month, he assembled all of the members of the National Security Council to appear on television with him.
"I'm hopeful that they've crossed that threshold of pain," the banker said, adding that only "time will tell." Another Washington expert commented that "making the decision on the wage law was very big and was a very positive step."
The second element of the new round of rescue measures involves a complete overhaul of the financing package between Brazil and international banks.
It was not just Brazil's failure to keep to its public spending and borrowing goals that undermined phase one of its financial rescue. Commercial banks did not fulfill their part of the bargain, either.
One of the main problems was that Brazil assumed it could keep relatively normal financial relations with its bankers. The economic team devised a complicated four-part plan for bank finance that relied heavily on continued trade financing and on the maintenance of money market credit lines between foreign and Brazilian banks.
But neither Brazilian central bank governor Carlos Langoni and his colleagues nor the major New York banks that worked with them on the first financing plan made sure that other smaller banks agreed with their strategy.
As it happened, regional banks here and around the world--terrified by the international debt problems that erupted last year and annoyed at being left out of the negotiations--pulled money out of Brazil in whatever way they could and left the money market lines several billion dollars short of the total that Brazil needed.
So far, phase two is going much better than phase one, bankers say. The new effort is being organized by William Rhodes, senior vice president of Citibank, who is generally credited with putting together a successful package with Mexico. Rhodes "runs a tighter shop" than the previous organizer, Antonio Gebauer of Morgan Guaranty, one Brazilian-based economist said. He is also making a marked effort to include smaller and regional banks in planning sessions, and to keep more of an arm's-length negotiating stance with the Brazilian team, sources say.
Big New York banks still dominate the negotiating committee, but Rhodes has put together "coordinating committees" for the United States, Europe and Japan. The U.S. committee includes eight regional banks. It held its first meeting in Chicago on Tuesday and will hold its next in San Francisco--to emphasize that the Brazil negotiations will not be solely a New York operation.
But the negotiations will be complicated and likely drag on "at least several months, perhaps until the end of the year," predicted the chief of Latin American lending at a major institution. Meanwhile, Brazil's arrears are likely to mount from the present $1.6 billion to close to $2.5 billion if it does not get any more money between now and the end of the year.
About $600 million of those arrears are overdue bank interest, one banker estimated. He said bankers will be unlikely to put up any more money to enable Brazil to pay off those arrears until the nation has signed an agreement with the IMF. However, another senior banker said that banks may decide to release the installments on a $4.4 billion medium-term loan that they have withheld since May if IMF Managing Director Jacques de Larosiere signals that formal approval is close.
Although the precarious cash position makes bankers nervous, they have been somewhat reassured by a change in Brazil's foreign exchange rules that gives the central bank control over who gets paid first. Priority is now being given to making payments for oil--which accounts for half of Brazil's import bill--and interest payments, sources said.
Brazil is also expected to ask governments that have lent to it to agree to a stretch-out of loan repayments under the aegis of the Paris Club, where creditor governments coordinate rescheduling of official debts.
The new negotiations will deal not only with the $5 billion to $6 billion in medium-term loans the banks are expected to have to put up next year, but also the $3 billion to $4 billion more Brazil needs this year, one senior regional banker said last week. On top of that, he said, the banks should formalize the $6 billion that still exist on short-term money market lines, perhaps by including the amount with the rest of the medium-term loans.
Rhodes is generally given high praise, but it remains to be seen whether even he can persuade banks to part with as much money as Brazil needs.