When a State Department report on human rights violations was released last month with criticism of Brazil, the Brazilians thumbed their noses and last week canceled a 25-year military assistance agreement with the United States.
It was a painless act because the Brazilians are no longer dependent on foreign aid handouts. The international banking community has become the underwriter of Brazil's economic and military development.
The Brazilians now have $27 billion in foreign loans outstanding, including $10 billion from U.S. banks and their foreign branches. New York's Citibank alone holds more than $2 billion in Brazilian loans.
These sums dwarf the amount of U.S. assistance to Brazil at the height of the foreign aid program in the mid 1960s. At that time, Brazil was getting about $300 million a year in grants and loans.
In other Latin American countries, too, international banking institutions are supplanting U.S. foreign aid as a primary source of financial support, Argentina, El Salvador, Guatemala and Uruguay, like Brazil, responded to U.S. human rights criticisms by rejecting further U.S. aid.
This new sense of independence from U.S. government policies is reflected in the new military situation in Latin America.
In the 1960s, the United States provided 35 to 40 per cent of all the armaments sold in America and financed many of the purchases with dollar grants. Today, studies indicate that the U.S. provides only 14 per cent of Latin American arms purchases that are now running at an annual rate of 2 billion.
The shift from U.S. bilateral aid to bank lending as a source of funds has sharply reduced Washington's leverage. When Secretary of State Cyrus R. Vance displayed open concern over Brazil's nuclear deal with West Germany a few weeks ago, for example, Rio's prestigious Journal do Brazil assured its readers that there was nothing to fear. Quoting unnamed official sources the paper reported that "the capacity of the U.S. government to apply pressure on Brazil is miniscule or nil, because the main economic transactions with the U.S. are handled through private bank loans rather than governmental aid."
What the paper called "a qualified source" was quoted as saying, "We are an important customer and it would hurt them (the banks) to lose this client." The same source added facetiously" that "the main U.S. bankers are Republicans."
The senior vice president of a New York bank which has large loans in Brazil said U.S. government officials have made no effort to apply pressure through the banks on Brazilian policy toward nuclear development, human rights or other issues. He said U.S. official concerns could not be transmitted through the banks.
"Our people feel quite strongly that we run the banks that it's our credit risk," he said. Officials of two other New York financial institutions echoed his attitude.
A State Department official with Latin responsibilities said that "Brazil sees in us the prime source of investments, markets, science and technology, but these are hard levers to use." Another State Department official said, "I don't think we have very much leverage. Trade is the big thing but this involves U.S. interests. You can't say to Brazil that we'll take all your shoes if you do this or that, because the U.S. shoe industry wouldn't stand for it."
Brazil has a financial stake in President Carter's decision, expected early next month, whether to accept sharply increased tariffs on shoe imports recommended by the U.S. International Trade Commission. However, Italy, Spain, Taiwan and South Korea have larger U.S. imports than Brazil and thus are likely to figure more importantly in Carter's decision.
A giant of a country which is by far the largest in Latin America in population as well as area, Brazil and its policies are of major importance in many fields, In its present form the nuclear deal with West Germany, for example, includes a fuel "reprocessing" plant capable of manufacturing atomic bomb material and thus eventually bringing atomic weapon capabilities to the back door of the United States. The human rights attitudes and policies of this big, important country - to take another example - are watched keenly by its neighbors.
Brazil is only one of many countries where directly applied U.S. government power has declined as foreign aid has given way to trade and bank loans, and as U.S. military assistance, military presence and the possibility of paramilitary "covert operations" have diminished.
President Carter's open, emphatic and unilateral policies on nuclear proliferation and human rights - in the face of declining U.S. power - touched special sensitivities in Brazil. This is particularly so because only 13 months ago Secretary of State Henry A. Kissinger signed a formal agreement pledging to consult Brazil on matters of world as well as bilateral importance.
Brazil's cancellation of the 1952 military assistance agreement with the United States was intended to dramatize its independence.
According to Morgan Guaranty Trusts "World Financial Markets," Brazil borrowed at least $740 million in publicized loans from foreign bank branches in 1973; $1.6 billion in 1974; $2.1 billion in 1975; and $3.1 billion in 1976. Last year's borrowing by Brazil was more than 10 per cent of the worldwide total of $28 billion borrowed by all nations in 1976 in the foreign "Euromoney" markets."
A New York financial source who has followed Brazil closely said the actual total for last year might be close to $4 billion including unpublicized transactions. The source said Brazil is "a preferred borrower" because it has always met its debt payments, and because it is a big country with large U.S. trade.
A banking magazine recently reported that the "alarming increase" in Brazil's overseas debts had made it more difficult to arrange loans for that country. However, fast-climbing coffee prices have doubled and redoubled Brazil's foreign revenues in the past few months, improving the country's financial standing.
A Citibank briefing for New York financial analysts recently estimated that Brazil's coffee earnings will sharply diminish its trade deficit and could even produce a trade surplus in 1977 if prices stay high and Brazil exercises reasonable control over imports.
Armed with this good fortune, Brazil's international borrowing boom may continue. There is no indication that the disputes with the United States over nuclear policy and human rights will have nearly as much effect on Brazil as the price of coffee.