NotiSur - 08/31/01 - Brazil, Argentina Via NY Transfer News * All the News That Doesn't Fit ------------------------------------------------------------ L A T I N A M E R I C A D A T A B A S E NotiSur - South American Political & Economic Affairs ISSN 1060-4189 Volume 11, Number 32 August 31, 2001 ------------------------------------------------------------ Copyright 2001, Latin America Data Base (LADB), Latin American Institute, University of New Mexico Director: Rebecca Reynolds Bannister Editor: Patricia Hynds Staff writers: Carlos Navarro, Robert Sandels LADB ARCHIVES: Back issues are referenced to provide historical background relevant to the articles in this newsletter. These can be accessed with a subscription to the LADB searchable on-line archives at http://ladb.unm.edu/ by clicking on Search Archive. For subscription information, e-mail info@ladb.unm.edu or call 1-800-472-0888. In This Issue: BRAZIL: INTERNATIONAL MONETARY FUND COURTED TO INSURE COUNTRY'S FOREIGN LIABILITIES * Brazil will get US$4.6 billion right away * IMF agreement involves sacrifices * Foreign dependency and debt remain * Social indicators improve slightly ARGENTINA: INTERNATIONAL MONETARY FUND AUTHORIZES NEW MONEY TO HELP BELEAGUERED ECONOMY * Government must meet zero-deficit goal * Trouble in the provinces RIO GROUP SUPPORTS ARGENTINA * Santiago Declaration reaffirms regional cooperation ____________________________________________________________ ********************* BRAZIL ********************* BRAZIL: INTERNATIONAL MONETARY FUND COURTED TO INSURE COUNTRY'S FOREIGN LIABILITIES By Matthew Flynn [The author writes for the International Weekly Edition of the Gazeta Mercantil, a Sao Paulo-based financial newspaper.] Because of the continuing economic crisis in Argentina, rationing of electric energy, and a worsening foreign-exchange rate, Brazil has sought the assistance of the International Monetary Fund (IMF) to help cover its foreign obligations. The latest accord, announced Aug. 8, renews the current agreement with the IMF, which was to expire Dec. 1, and provides Brazil with US$15 billion in new IMF funds. "Brazil is a country with an enormous capacity to overcome its problems," said Finance Minister Pedro Malan. "We beat hyperinflation, we survived the Asian crisis, the Mexican crisis, the Russian crisis, and exchange-rate volatility just as we will overcome the energy crisis and the Argentine crisis." While the latest injection of funds should ease Brazil's external vulnerabilities in the short term, ongoing foreign and domestic crises combined with increased belt-tightening will adversely affect economic growth and lagging social indicators. Even the US$8 billion that the IMF just agreed to lend Argentina is no guarantee that times will improve (see other article in this edition). Brazil will get US$4.6 billion right away Although the latest accord with the IMF will not be signed until September, some US$4.6 billion of the US$15 billion total will be available to Brazil immediately. To withdraw the remaining funds, the government will have to post a primary public-sector surplus (revenues minus expenditures excluding debt payments) equal to 3.35% of GDP in 2001 and 3.5% of GDP in 2002. While that will not be difficult this year--the 12-month primary surplus has already topped 3.9% of GDP--economists believe next year's goal may be hard to meet with a slower- growing economy and presidential elections. On the positive side, Brazil received permission to lower its international-reserves floor from US$25 billion to US$20 billion, which will give it more firepower to defend its beleaguered currency, the real. The currency has lost more than 30% of its value against the dollar this year. Together with US$3 billion in reserves expected to remain after its foreign-debt payments this year, the Central Bank will have US$8 billion at its disposal to intervene in the foreign-exchange markets. Regarding inflation, the IMF's 4% goal for the consumer price index (Indice de Precos ao Consumidor Amplo, IPCA) this year remains intact, but the IMF has said it will accept up to 5.8% plus a two-percentage-point leeway. The IPCA for twelve months had already hit 7.35% by the end of June. The new accord will expire on Dec. 1, 2002, the same day that President Cardoso will end his term, leading some political analysts to consider the agreement a "blindagem eleitoral" or financial armor for next year's election. IMF agreement involves sacrifices Finance Minister Malan, responding to criticism of the latest accord from some lawmakers, insisted that the country had not ceded any of its sovereignty as a result of any conditions attached to the agreement. "It is an insane, mistaken point of view of those who do not participate in the [economic decision-making] process to say that Brazil is submissive to the IMF," said Malan. Opposition politicians and economists are particularly critical of the degree of fiscal belt-tightening required by the IMF. With the federal government committed under the accord to a primary surplus equivalent to 3.5% of GDP in 2002, Planning Minister Martus Tavares says the budget will have to be cut by an extra US$4.04 billion next year. The combination of economic difficulties in Argentina, the worldwide recession, energy rationing, and high interest rates have put the brakes on Brazil's economy. The latest growth figures released from the Instituto Brasileiro de Geografia e Estatistica (IBGE) surprised government officials and economists. The IBGE reported that the country's GDP fell 0.99% in the second quarter of this year, compared to the first quarter. "We were already expecting a fall, but it was a little greater than had been predicted for us as well as for the market," said Central Bank president Arminio Fraga. President Fernando Henrique Cardoso added, "We need to see a fine tuning in interest rates, so that we can keep the economy moving." The domestic and international crises, compounded by high interest rates, have hurt industry, and many companies have been forced to lay off employees. The economic downturn, resulting in fewer taxes and increasing demands on the federal budget, is likely to add to the conflict regarding the use of public resources. Brazil's Supremo Tribunal Federal (STF) recently ruled that the federal government must give a pay raise to public employees. After not receiving a salary increase since 1995, federal employees are striking to protest the government's proposal for an increase of only 3.5%. Cumulative inflation has risen 75.48% since the last raise in 1995. Tavares maintains that the budget can be cut without raising taxes and insists important social programs will be spared. Details of how the numbers will be juggled will not become known until the end of August when the federal budget is presented to Congress. Another issue causing criticism is that the new IMF agreement continues to include debts of federally owned companies as part of the primary budget-surplus goal. The lack of investing by electric companies still owned by the state is one reason for the current energy crisis, which could be shortened if the government were not handicapped by IMF- mandated fiscal goals. Foreign dependency and debt remain The principal reason for seeking extra funds from the IMF was to help the country meets its foreign-accounts obligations. In the past, Brazil has been able to pay its current account with foreign exchange obtained from foreign direct investment (FDI). Economic recessions in the US, Japan, and elsewhere, however, have reduced FDI 30% this year and exports have not risen to compensate for the fall. Calculations by the government's economic team show the deficit in the current account should amount to US$26 billion, of which only US$20 billion will be covered by inflows of FDI. Dependence on foreign capital to finance its development has left Brazil more vulnerable to contagion from foreign crises such as the one in Argentina. The Plan Real and neoliberal reforms promulgated by President Cardoso have not improved the situation. From 1995 to 2000, payments on the country's foreign debt have risen from 3% of GDP to 9.4%, and they now consume more than 100% of the money earned from exports. Net foreign debt amounted to 31.9% of GDP in 2000, compared to 13.1% in 1995. "There is a chronic problem that we have been unable to free ourselves from," said Marcos Caramuru, secretary of international issues at the Finance Ministry. "The way out of this situation is to increase our insertion in international trade." He added that there is no short-term solution to the problem. Paul Singer, an economist affiliated with the left- leaning Partido dos Trabalhadores (PT), remains critical of the latest IMF accord, which, in his view, will not improve the country's development. "Control of the exchange rate did not even last one week," he said. The economist favors controlling the entrance and exit of capital. Social indicators improve slightly Ten years after Brazil signed a UN accord to meet 27 goals to improve the living standard of its children, the country has made considerable advances but still remains at the same level as El Salvador in that regard. Goals for none of the five most important indicators--infant mortality, maternal deaths, malnutrition, water, and sewage--were wholly achieved. "There have been advances, without a doubt, but we are still behind," said Oded Grajew, president of Instituto Ethos, which encourages increased social responsibility by business. "While the interest rate account receives more than the health and education sectors together, we will continue to have some horrible indicators." While higher basic interest rates, now at 19% a year, will increase the country's debt by US$10 billion, fiscal austerity, amounting to 3.35% of GDP this year and 3.5% for 2002, will squeeze US$34.36 million out of needy social programs--equal to 400% of the budget of the Health Ministry. Brazil has yet to find a way out of exploding debt and decreasing social expenditures. ********************* ARGENTINA ********************* ARGENTINA: INTERNATIONAL MONETARY FUND AUTHORIZES NEW MONEY TO HELP BELEAGUERED ECONOMY The Argentine government of President Fernando de la Rua reached an agreement with the International Monetary Fund (IMF) on Aug. 21 that will provide Argentina with US$8 billion in fresh aid aimed at warding off a debt default and rebuilding confidence in the national economy. After 12 days of negotiations, IMF managing director Horst Koehler said he would recommend that the IMF board approve an increase of US$8 billion in Argentina's current stand-by credit. US$5 billion would be available immediately upon board approval, expected in early September. The US administration of President George W. Bush had been reluctant to support the action. As recently as Aug. 17, US Treasury Secretary Paul H. O'Neill voiced concern about new loans to Argentina. "We're working to find a way to create a sustainable Argentina, not just one that continues to consume the money of the plumbers and carpenters in the United States who make US$50,000 a year and wonder what in the world we're doing with their money," O'Neill told CNN. Despite the Bush administration's public position against multibillion-dollar aid packages to economies in trouble, its practice has been less clear, and O'Neill has backed bailout packages for Turkey and Brazil as well as Argentina (see other article in this edition). For many analysts, Argentina's economic problems are so severe that new loans are seen as having no more chance of ending the crisis than did the US$40 billion package negotiated last December. The new money does not guarantee growth, and the risk remains that Argentina will be unable to make its debt payments. Buenos Aires-based consultants Argentine Research say the country has US$7.7 billion in maturing debt in the second half of 2001, including US$2.9 billion in foreign debt. "This is like a band-aid; we really need to get to the main issue, which is some sort of debt restructuring," said Geoffrey Dennis with Salomon Smith Barney. "The golden rule in today's world is zero-deficit or surplus," said Myrna Alexander, the World Bank representative in Buenos Aires. "Argentina should have achieved zero- deficit in 1996, when it had one of the world's highest rates of economic growth, but it missed its chance." Alexander said the objective of a new bailout is not to preserve the current economic model or to prevent an erosion of the consensus on the need for austerity measures. "The world and the multilateral institutions have a commitment to improving people's lives and to keeping the Argentines from falling into crisis," she said. Government must meet zero-deficit goal Economy Minister Domingo Cavallo said no new IMF requirements were attached to the aid, but Daniel Marx, Cavallo's vice minister, said the aid was based both on budget forecasts and on the government's pledge to erase its budget deficit during the second half of the year (see NotiSur, 2001- 08-03). The question is whether the government can stick to its zero-deficit plan, which calls for highly unpopular salary cuts for state workers and for some pensions. The cuts have set off nationwide protests that show no sign of abating. On Aug. 29, tens of thousands of union members, retirees, and unemployed workers marched in Buenos Aires in one of the largest protests in recent months. Seven austerity plans in 20 months have failed to pull the economy out of its three-year recession, curb the rise in unemployment, or rebuild confidence. A growing segment of society is fiercely resisting the austerity measures. Business associations and the Catholic Church have joined trade unions in criticizing cuts to public spending when poverty, unemployment, and social inequality are on the rise. The government's acceptance of IMF solutions with their mandated austerity measures has also split the governing Alianza coalition. Nearly all the moderate and left groups that backed de la Rua's candidacy in 1999 have abandoned the Alianza, with opposition politicians eagerly eyeing the October legislative elections. But the de la Rua administration has refused to consider alternatives. A year ago, the Central de Trabajadores Argentinos (CTA), one of the three central trade unions, called for unemployment insurance that would amount to monthly stipends of US$380 for heads of households, plus US$60 per school-age child. It suggested reinstating taxes on banks and supermarkets and on utilities privatized in the 1990s to obtain the US$8 billion needed to implement the plan. Although the government ignored the CTA's proposals, the union is collecting signatures to put its initiative on the ballot as a referendum in October. In July, the Union Industrial de Argentina (UIA) drew up its own recommendations that made the internal market a priority. The UIA believes the only way to balance the budget is by reactivating and strengthening the domestic market. "What we must do is recreate a `virtuous circle,' which would require an indispensable redistribution of income in favor of wage-earners, to get local capitalism functioning again," said UIA president Ignacio de Mendiguren. Other proposals call for taxes on capital gains and on speculative capital inflows, but all have been dismissed by the administration. Meanwhile, the Catholic Church has been increasingly critical and has publicly expressed support for alternatives to the current economic model. Cavallo dismissed those who call for changes in economic policy, saying, "They talk about redistributing rather than producing." Trouble in the provinces With 16.4% unemployment and a third of the country living in poverty, provincial governors have warned that spending cuts would be difficult to implement and hard on the poor. Provincial governments already are unable to meet their financial obligations. Buenos Aires province, the country's most populous, richest, and most indebted, recently began paying suppliers and some public-workers' salaries in bonds, called patacones. "There is no other money to pay salaries, and there won't be for several months, because everything indicates that the crisis is going to deepen," said Buenos Aires Gov. Carlos Ruckauf. "Those who don't want to take patacones are within their rights to go to court, but I don't have the pesos to pay them. Paying with patacones is a necessity, not a whim." The one-year bonds, officially "a Treasury letter in cancellation of obligations," are redeemable at 7% interest next year. The patacones look similar to the Argentine peso and are even dispensed through ATM machines like cash. "We think this is going to work very well," said the province's finance minister, Jorge Sarghini. He said public workers would receive patacones for anything they are owed above US$740 a month. Many workers do not share Sarghini's belief that the system will work well. "The electricity company accepted the patacones," said police officer Angel Diaz, "but the phone company wouldn't take them, the credit card company also said no, and the gas company said I can only pay 30% of my bill with them. The lack of confidence in this plan is obvious." On Aug. 23, thousands of teachers, hospital workers, and judicial employees demonstrated outside the governor's residence, carrying signs reading, "Pay the foreign debt in patacones." The bonds could increase the president's problems. Nearly half the provinces are talking about issuing bonds, which could complicate efforts to maintain the zero deficit. Further straining relations with the provinces, Cavallo said that the government could not guarantee the fixed amount in monthly payments it makes to the provinces. In November 2000, the government signed an agreement with the 23 provinces and the city of Buenos Aires to provide them with US$1.364 billion per month. "The national government agreed to transfer to the provinces a percentage of what it collects in taxes, and if that revenue didn't reach a certain minimum level, it was assumed the government would obtain loans and transfer that money [to the provinces]," Cavallo said in an interview published in the daily Clarin on Aug. 26. "Now there are no loans so there is no money to transfer." Cabinet chief Chrystian Colombo is set to meet with the governors, the majority of whom belong to the opposition Partido Justicialista-peronista (PJ), to discuss the provincial tax transfers and convince them to eliminate their budget deficits by trimming public spending and helping to boost tax collection. The changes in tax transfers were among the commitments that Argentina made to secure the fresh funding from the IMF. The administration wants Congress to pass a law to modify the amount of provincial transfers, but the PJ governors have vowed to fight any effort to cut the transfers. [Sources: The Financial Times (London), 08/12/01; The Philadelphia Inquirer, 08/13/01; Inter Press Service, 08/13/01, 08/17/01, 08/23/01; The New York Times, 08/22/01, 08/26/01; Associated Press, 08/22/01, 08/29/01; Reuters, 08/24/01, 08/26-29/01; CNN, Notimex, 08/29/01] ********************* GENERAL ********************* RIO GROUP SUPPORTS ARGENTINA The 19 Latin American nations of the Rio Group met in Santiago, Chile, Aug. 17-18 for their 15th annual summit. While the leaders issued an urgent call to the US to help Argentina, which is mired in an economic crisis that threatens to spill over into the rest of the region, they also directed attention to political and social problems in the region. The closing address was delayed an hour as summit host Chilean President Ricardo Lagos spoke by phone to US President George W. Bush. Lagos was apprising Bush of the leaders' concern that talks between the International Monetary Fund (IMF) and Argentina were dragging on and increasing unease in global financial markets. The Rio Group, created in December 1986, is Latin America's highest-level forum for political consultation and coordination. It evolved out of the Contadora Group--Mexico, Panama, Venezuela, and Colombia--which worked to promote peace in Central America in the 1980s. It now includes Argentina, Brazil, Bolivia, Colombia, Chile, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela. In opening the meeting, President Lagos said that today the Rio Group must concentrate on economic issues and how they influence the daily lives of the Latin American people, which means including economic and social concerns on the region's political agenda. The principal theme of the summit was the new economy and the widening technology gap between the developed and developing worlds. It also examined globalization's ability to magnify the impacts of financial crises on the region. Santiago Declaration reaffirms regional cooperation The final document, the Santiago Declaration, repeated many of the foundational principles of the Rio Group. It explicitly supported strengthening representative democratic systems in the region as defined by the Democracy Charter of the Organization of American States (OAS), which government leaders will sign in September at a special session in Lima. Venezuelan President Hugo Chavez proposed incorporating the concept of participatory democracy as a better expression of democracy than representational regimes. But some presidents objected, interpreting the proposal as favoring the government in Cuba, which has mixed support in Latin America. The group approved adding text calling for the region to continue "deepening the quality of its democratic institutions, with legislation that guarantees the effective, ethical, and responsible participation of citizens within a legal framework that conforms to the respective institutional order." In addressing the information theme, the declaration said, "We recognize that classic productive factors, such as natural resources and cheap manual labor, are losing relative importance in the context of the information society." It called for creating mechanisms and regulations to prosecute and punish Internet-related crimes. The declaration stressed the importance of foreign direct and portfolio investment to trade and market liberalization in the region. "A permanent concern of the Rio Group has been the way market instability and financial crises have affected our efforts to improve, open up, and stabilize [our economies]," the document said. "We must promote the orderly and free development of capital flows, as well as the machinery to underpin a more stable international financial system." Peru's President Alejandro Toledo proposed freezing arms purchases and directing the resources toward social development and combatting poverty. While the proposal met heated debate, particularly from Chile, the group approved a first-ever call to limit military spending. The declaration states "the firm proposal to adopt measures that contribute to an effective and gradual reduction of defense spending in the region, with the goal of making greater resources available for the economic and social development of our countries." The document also recognizes "collective responsibility in confronting humanitarian crises" in the region, rather than the original draft's call for "mechanisms of intervention" in situations like natural disasters, epidemics, and hunger. Removing the reference to intervention was requested by Colombian President Andres Pastrana, whose nation is on the receiving end of the US-backed and largely military US$1.3 billion Plan Colombia. The declaration also proposes "incorporating the gender dimension" in governmental policymaking processes and promoting the recognition of native people's rights throughout Latin America. The meeting largely escaped the protests that have marked most other international meetings in the past year. The Rio Group represents "growing collaboration aimed at approaching [problems of] our continent from a Latin American perspective," said Manuel Baquedano, president of the Santiago-based Instituto de Ecologia Politica (IEP), in explaining why local protesters had not targeted the summit. "This is one of the few presidential-level forums that is autonomous and capable of holding up the demands of Latin American countries vis-a-vis the nations of the North, of Asia, and of Europe." [Sources: Inter Press Service, 08/18/01; The Financial Times (London), 08/19/01] ================================================================= NY Transfer News Collective * A Service of Blythe Systems Since 1985 - Information for the Rest of Us 339 Lafayette St., New York, NY 10012 http://www.blythe.org e-mail: nyt@blythe.org ================================================================= pvtsa-08.31.01-11:00:32-7708