The Winner May Already Be a Loser


This past August, the International Monetary Fund (IMF) concluded a $30 billion loan agreement with Brazil, the largest economy in South America, even though the country is about to elect a semi-socialist president. Sounds risky for the International MFers, doesn’t it? Well, it’s not. According to Marcos DePaiva, of Brazil’s Finance Ministry, who helped negotiate the bailout package, the IMF controlled for all political contingencies. He told the press that democracy works best when foreign creditors can be certain that: 1) the new President, whoever he is, will do just exactly as the old President did, and 2) the voters will have little or no influence on their newly elected leader where money is concerned. “If you are trying to change the usual patterns of what happens with a change of government in a Latin American democracy,” said De Paiva, “you need to change the incentives. In this case, the new administration would have access to resources (i.e., IMF funds) in a way that ought to guarantee [good] governance in the first year.”

So, that’s a relief. Our banker friends were feeling queasy about the intimidating lead in the polls held by Luis Inácio Lula da Silva, the presidential candidate of the Brazilian Workers’ Party who may well win the October election. For some years now, Mr. Lula has stumped the country with disturbing promises of jobs and land for poor people. He has made even more upsetting observations about excessive wealth, lack of sovereign control over Brazil’s economic policy, and the poorly concealed disadvantages for the popular classes built into the negotiations for the Free Trade Area of the Americas, the treaty beloved by G.W. Bush, Paul O’Neill, Trent Lott, Henry Kissinger, and almost every other old white man with an income of over a million a year that we can think of.

The Bankers, actually, had plenty to be uneasy about in Brazil besides Lula’s impending election. Like Argentina, Brazil has an external debt equal to roughly half of the annual “Defense” budget of the United States, which is therefore more than anyone can expect to repay ever. Over the years, Brazilian capitalists have borrowed huge pots of money from willing creditors such as Citigroup, J.P. Morgan Chase, Bank of America, Fleet Boston, Deutsche Bank, the Bank of Tokyo-Mitsubishi, Standard Chartered Group, and Banco Santander of Spain. In exchange for the high risk assumed in lending to Brazilians, whose country could go up in flames at any time thanks to millions of highly mobilized–and steaming mad–jobless proles and landless peasants, the banks also exacted steep interest payments and allowed only short-term borrowing. As the debts come due–which is all the time now–the borrowers have to buy large sums of dollars to pay them back, driving up the cost of the dollar in Brazil and driving down the value of the real, the Brazilian currency. As this occurs, the Central Bank of Brazil attempts to control the continuing rise in the price of the dollar by selling billions of its own dollars, thus drawing down its reserves to dangerously low levels and igniting fears of a default on public debt, which, for the most part, must also be paid in U.S. dollars.

Of course, once the Big Banks begin to fear a default on the Government’s debt, they start calling in all their loans and refusing to lend any more to anyone. Unfortunately for everyone concerned in Brazil, under the current President, Fernando Henrique Cardoso (FHC), it has become fashionable to pay off your old loans with your new ones. It’s sort of like paying your mortgage with your MasterCard, only the interest rates are higher. When you hit your credit limit–or your new loans stop–you are going to start getting those rude and challenging phone calls from collection agencies.

Hey, the check is in the mail, okay?

Uh, no, not okay. When J.P. Morgan wants his money back, he damn well wants his money back, and he wants it NOW. Overall, business in Brazil has been trying hard to pay up. With encouragement from FHC and his IMF-inspired, export-led growth policies, the Brazilians have been chopping down and shipping out every single growing thing of value they can find, together with all they can manufacture on the cheap. To keep up the payments on the public debt, FHC has slashed the government’s budget by firing everyone in sight and cutting old people’s pensions. Lamentably, these measures have not been enough. And so, this summer came the inevitable: FHC and his cronies went pleading and begging to the IMF for a big bundle of new loans so that they could keep their currency afloat and pay off Mr. Morgan, Mr. Mitsubishi, and Mr. Deutsche.

Early on, the Bush Administration had declared that it would not be party to these IMF rescues. In a random burst of populism Paul O’Neill himself complained that the IMF often protects rich creditors from losses on their high-stakes gambles in low-wage countries using dollars collected from America’s “plumbers and carpenters”–and from the taxpayers in the Fund’s 183 other member countries.

Oh, so what? That was then. At the instigation of the Bush Administration in August, the IMF came up with the dough for the Big Banks, a maneuver which they described as a financial package to bail out Brazil. But the real deal is that Brazil is not actually bailed out. Brazil is still taking on water in the engine room and listing badly to port. The Bankers are bailed out.

That’s how the free market works. We don’t know why they call it “free,” though, because it is really quite expensive if you’re a taxpayer. Thirty billion plus, for example, on this maneuver alone. If you’re a Brazilian taxpayer, it’s going to cost you even more, because FHC acceded to many of the IMF’s favorite demands in order to close the deal: “continued rationalization in the public sector, fiscal equilibrium, sound budget and revenue-producing practices, and flexibilization of labor laws.” In plainer language, these policies mean fewer decent jobs, less spending on social services, higher prices on almost everything anyone needs, and less legal protection for workers. Note how the IMF and FHC aim every single shot right straight at working people. With more flexibilization, for example, those lucky enough to still have jobs after the government finishes its next round of dismissals can limber up and spring acrobatically from one miserable pursuit to another without encumbering employers (or the State) with burdensome severance payments, insurance, or living wages. And rather than taxing wealth or income, the IMF prefers for its indebted governments to tax clothing, food, gasoline, soap, and aspirin.

So the logical question here is, “How did the IMF get the candidate from the Workers’ Party to sit still for this?” Insiders say that there was no way the IMF would have agreed to such a sizable loan without the tacit approval of the most-likely new President. For his part, Mr. Lula has toned down his rhetoric about the IMF and now speaks mainly about economic growth as the road to Brazil’s recovery, rather than restructuring the country’s economy. Quietly, he’s claiming that he’s responsible for the terms of the loan being less punitive than they might have been. Maybe he’s telling the truth, who knows? It seems unlikely, since he’s a politician. But it’s true that the loan will ease him right on down the road to extremely unpopular policies: Most of the borrowed money will be disbursed in 2003, which means that the new President will have a little room to breathe during his first year in office. He will also be allowed to continue the necessary investments in Petrobras, the Brazilian government’s oil company that holds the same level of sanctity as the national soccer team and the samba. And he will be allowed to draw down the Central Bank’s dollar reserves to one-third of what the current President is required to have on hand. After that, though, the ax will, by God, fall. And the government will have to start cutting its budget and sending off larger and larger checks to the IMF. By his second or third year in office, Lula will find himself with no funds for jobs or land reform, the largest debt to the meanest banks in the world, no dollar reserves and nothing left to sell but Petrobras, which is, at this point, still unthinkable and will very possibly make him the most unpopular head of state since the Portuguese Emperor.

We know that Lula, as well as the other left-wing presidential candidate in Brazil, signed on to this because the Ministry of the Treasury in Argentina told us that they did. And they were not the first. According to the Argentines, the IMF first blackmailed all likely presidential candidates in Turkey in 2001 before agreeing to a new loan there. The technique worked so well with the Turks that they decided to use it in Brazil. Next, they’re planning to do the same in Argentina. With a set-up like this, you would think that the Big Banks would be happy. Their loans will be repaid with interest on schedule, and in the process the political left will be discredited as venal, helpless, and probably corrupt. Who could ask for more? The Bankers, that’s who. True, they were delighted with their bailout–for about a week. But then they began to get “anxious” and “jittery” again. You’d be edgy too, if you had billions of dollars tied up in the biggest pyramid scheme in history, no matter how many putative socialists you had forced to follow your economic prescriptions and swallow the revolting concoction. The Bankers know that the IMF justified the new loan by using Enron economics: To qualify for disbursements, Brazil is required to run a budget surplus next year of 3.75 percent of its GDP, but the Finance Ministry is allowed to exclude interest payments from its accounting for expenditures. Quite simply, the IMF allows Mr. DePaiva of the Finance Ministry to shift about 30 percent of the government’s liabilities off the books. While Brazil will appear to be running a surplus in 2003, it will actually continue to operate with a whopping deficit, and sooner rather than later, the government will be bankrupt.

In the end, of course, it will not be Lula, Marxism, or socialism that brings the capitalist system crashing down in Brazil. It will be the big fat Bankers themselves. By insisting that the fiscal crisis is the result of a costly public sector which must therefore be cut to the bone (with the resulting savings remitted to the IMF, Mr. Morgan, and his ilk), they are draining all employment and income, just as they did in Argentina. Because of the IMF and the greed of its beneficiaries, there’s no decent work, so there’s no money, no demand, and no tax revenue. For Brazil to recover, capital has to be pumped into the economy and not sucked out. This is not Lenin; it’s basic Keynes. Remember John Maynard! It’s basic Alan Greenspan, for God’s sake. In case of recession, stimulate the economy, prime the pump. In Brazil, nobody is really expecting democratic socialism or the workers’ paradise, Lula or no Lula. But a small dose of John Maynard might still help.

Gabriela Bocagrande is a writer in Washington, D.C.