All financial attention today is on Brazil, where the almost certain election of leftist Luis Inacio Lula da Silva has driven interest rates on government bonds to 22 percent.
Brazil, in effect, finds itself in the midst of a confidence game familiar to many developing countries that take on lots of debt -- in this case $260 billion, 20 percent of which is held by foreigners.
If da Silva can convince foreign and domestic bondholders that he will make good on his pledge to maintain a budget surplus and forswear defaulting on Brazil's debt, then rates would fall back to reasonable levels, the economy could grow again, and the government would be able to roll over debts and stay current with its interest payments.
On the other hand, if investors remain uneasy, the high rates would be likely to plunge the country into recession and the government into a budget deficit, making default inevitable. Fear of default, in effect, would become a self-fulfilling prophecy.
To bolster confidence and help avoid default, the International Monetary Fund has pledged to lend Brazil $30 billion. But if da Silva can't convince lenders that Brazil will not default and that it will hold to its promise of a budget surplus, the IMF will face the familiar dilemma of deciding whether to increase the bailout and throw good money after bad, or risk that defaults by Brazil and Argentina will trigger a financial crisis in other developing countries.
Lousy choices. Big risks. Lots of money.