The international banking tremors brought on when successive financial crises in Mexico, Argentina and Brazil threatened to set off a Third World "debt bomb" have abated as a series of financial rescue packages have fallen into place.
Each country now has a stringent economic austerity program, designed by the International Monetary Fund to cut dependence on foreign cash. At the same time, the IMF also has taken on a newly public role of helping to arrange agreements between the debtor nations and their commercial bank creditors to gain extra time to pay off their loans and extra cash to keep afloat while the austerity medicine takes effect.
But the amounts of money owed and needed, and the number of countries involved, have made managing the world's debt crisis a new game for all the players. As the case of Brazil is beginning to show, good behavior in acceptance of the traditional IMF program is no longer a guarantee of financial reward from nervous bankers.
The commercial loans are still being made, but only reluctantly, and on nothing like the scale that enabled Brazil to notch up one of the fastest growth rates in the world. In addition, it is clear that at present the bankers are no happier about lending to Brazil than they are to other debtors who are less helpful about taking their medicine.
Despite the pain, Brazil, in the words of one of its economists, has gone out of its way to play the "good boy." It has made interest payments on time, negotiated swiftly with the IMF and agreed to very tough economic conditions. The Brazilians, with debts of more than $80 billion, have "done this the way it ought to be done," U.S. Ambassador Langhorne A. Motley says.
But, he adds, "the irony is that there is no justice" or reward for playing by the rules. Brazil is being treated little better than other debtors who have missed interest payments, failed to disclose just how bad their finances are, or held out longer against accepting tough IMF conditions. For Brazil, the IMF conditions, which include a halving of the public sector deficit and stringent cutbacks in imports, will squeeze industry, hold interest rates high and force up unemployment just as they do in other countries that bankers complain have been less compliant.
Now, though Brazilian officials insist the package they worked out with the IMF and their private bank creditors will work, others are more doubtful.
Already, there are reports that Brazil will be forced to ask bankers for more money later this year than the originally agreed-to program forecasted. Finance Minister Ernane Galveas rejects the idea, calling such reports either "a mistake or a provocation." Planning Minister Antonio Delfim Netto, the nation's economic czar, was not so emphatic. The government's trade targets for fewer imports and more exports "are very hard but feasible," he said. He added, however, that if Brazil does need extra cash to meet its payments gap "it would be very small," and bankers "will help us."
But "it's going to be tough," commented one foreign expert in Brazil who has followed the crisis closely.
During the late 1960s and early 1970s, the so-called "miracle years," Brazil managed a spectacular 11 percent yearly growth rate by building up its economy with borrowed money. When times became hard following the first oil crisis, more money was borrowed to keep Brazil growing and to service the old debts.
Confidence finally collapsed in the wake of Mexico's near bankruptcy last August. The foreigners wanted their money back, and Brazil could not pay.
The IMF itself noted in a report this month that "the present state of international financial markets and prospects for the period ahead clearly indicate that the path of economic development followed by Brazil in the past is no longer feasible, and . . .a fundamental change in the country's economic strategy is required." Rather than depend on overseas borrowing to support investment and growth in Brazil, the country "will depend much more on the generation of larger domestic savings."
Despite Brazil's agreement to the traditional IMF remedy and the added input of direct IMF participation in the negotiations with the commercial banks, private economists and opposition politicians see two critical short-term problems in Brazil's financing package. One is that Brazil may be unable to achieve the $6 billion trade surplus that it has forecast for 1983 and that it needs to help service its debts and repay emergency short-term money due this year. The other problem is that banks may be unwilling to come up with all the money that Brazil has counted on them to provide this year.
The agreement between the IMF, Brazil and its bankers assumed that private banks from around the world would increase their loan exposure in Brazil by close to 7 percent this year, despite the drastic scramble to get out last year. U.S. bankers who now wish that they had never lent any money south of the Rio Grande would rather be reducing their exposure than increasing it. But from Brazil's point of view, the 7 percent increase is considered a bare minimum. It is "significantly below the rate of the past several years 20 percent a year since 1978 ," the central bank pointed out. Without it, the recession that is widely forecast for this year would be even more severe.
Central Bank Governor Carlos Langoni claimed earlier this month that "we don't need any more money" provided Brazil can meet its trade surplus target. The nation asked for all the money that it needed and will get it, he said.
But the experience of the last few weeks suggests Langoni may be wrong.
Despite the agreement reached with bankers at the end of February, Langoni and other officials are still sometimes engaged in a frantic search for enough cash to cover import bills and keep up interest payments, sources say.
"The government is acting like a financial treasurer," complained Joao Sayad, new finance secretary of the state of Sao Paulo, where Brazilian industry is concentrated and about 40 percent of the nation's total output is produced. It is a "continual challenge" to keep up the level of foreign bank deposits in Brazilian banks, on which the nation depends for dollars, Motley said.
The problem, according to one observer, is that Brazil made the mistake of assuming that financial markets would return to near-normal this year after last year's hiccup. The government asked bankers for a complicated four-part financing package, two parts of which have proved difficult to control. In addition to a new long-term loan of $4.4 billion and the rollover of another $4 billion of other loans due this year, Brazil asked banks to keep on lending for trade financing and to restore the levels of money-market lines that they had with overseas branches of Brazilian banks.
Bankers have not restored their credit lines to Brazilian banks to the $9 billion level originally requested, a development the government and its creditors did not allow to hold up agreement on the IMF loan and on the first two parts of the financial package. They "just declared victory and walked away," Motley said, leaving Brazil without sufficient cash to manage its payments easily. Furthermore, foreigners are apparently not lending as generously for trade as officials had hoped, although bankers have officially promised to provide more this year than Brazil requested.
New York bankers say that Brazil's cash-flow problems are manageable at present and have not gotten any worse in recent weeks. It is too soon to tell now whether the nation will need more cash, one said, suggesting that bankers will "sit down again" in May to see how Brazil's cash position is shaping up.
Economist Adroaldo Moura Silva believes that the $6 billion trade surplus cannot be achieved. "At best it will be $3 billion to $5 billion . . .," he said. Even the IMF initially questioned the trade figure, Brazilian sources reported. The fund doubted whether Brazil could boost its exports by the 14 percent needed to reach the $23 billion government goal. As a result, the IMF plan outlined a stiffer drop in imports--from $19 billion to $16 billion instead of to $17 billion--to achieve the planned surplus. Brazilian officials now use a range for the trade targets.
Cheaper oil, a stronger than expected U.S. recovery, and the boost to exports that should come from a 23 percent devaluation against the dollar last month mean there is a "greater probability of reaching the goal" than three months ago, Langoni said. Many economists in Brazil agree that these factors will help, but they still expect the trade balance to come up short.
This is partly because of a more fundamental problem with the government's IMF-approved plan: it hurts too much for Brazil to be able to keep to it, some say.
The program is "a suicidal kind of policy" that will doom Brazil to a third year of recession that it can ill afford, one economist said. It faces considerable poverty with a rapidly growing population. "A country like Brazil can't stop growing like a developed country can," according to industrialist Luis Eulalio Bueno Vidigal. More bluntly, the IMF's plan is to "resolve an economic crisis with a social crisis," said Cesar Maia, finance minister for the new leftist opposition party that has won power in the state of Rio de Janeiro.
Despite the strong language, Vidigal added that he did not think industrial opposition to the government would change its policy. "I don't see how we can change . . .We have no option now" but to do what the IMF and bankers want, he said.
Brazil needs growth of 5 percent or 6 percent a year just to stop unemployment from rising, Delfim Netto agrees. But with the richer foreigners who supported Brazil's growth and development in the past now unwilling to go on lending, the nation has to try, not simply to live without this lending but also to "repay part of the savings we have already taken" in loans from overseas, he said.
There is no way to do that without slowing the economy and cutting back sharply on buying from overseas, government officials say.
Cutting imports hurts because although they are only small in relation to the approximately $300 billion Brazilian economy--less than 8 percent of the total economy last year--they are "a very critical . . . slice," Delfim Netto said.
Imports will only come down significantly if the government slows its spending and screws down the private economy in line with its economic program. So far it appears that spending, particularly in the many state-owned enterprises that account for a huge proportion of the Brazilian economy, has not yet dropped in line with the plan, an expert said. The government has now set up a committee to monitor state spending on a weekly basis, and make sure that the plan is met, one foreign expert said.
Whether because the $6 billion trade surplus does not materialize or because of continued shortfall in the capital flows into Brazil, the consensus outside the government seems to be that Brazil will be back for more money this year. "I'm afraid the Brazilian government has to negotiate again in a very short time," an opposition senator said.
New York bankers are prepared for this, several said. Provided Brazilian officials can show that the nation is on the road to adjustment, requests for more money will be greeted sympathetically, several other bankers predicted.
If not, Brazil will have to squeeze its economy still more, one informed source said.
Confronting complaints that the government already has promised its creditors too much in return for their money, Brazilian officials--and creditors--are keeping their fingers crossed that a strong U.S. recovery will come in time to boost Brazilian exports and cheer up the world financial system.