Lula backs IMF loan

Louis Proyect lnp3 at
Fri Aug 9 11:41:15 MDT 2002

NY Times, Aug. 9, 2002

I.M.F. Loan to Brazil Also Shields U.S. Interests

WASHINGTON, Aug. 8 — To hear the Bush administration tell the story, there 
is one main reason that Brazil should be rescued with a $30 billion loan 
while Argentina should get nothing: Brazil has been good; Argentina has 
been bad.

In explaining their abrupt reversal in deciding to support a huge bailout 
for Brazil, something that seemed odious to the White House a few weeks 
ago, administration officials said today that Brazil had earned support 
because it had moved courageously to open its markets, fight inflation and 
put its fiscal house in order.

Argentina, by contrast, reacted to its currency crisis by defaulting on 
most of its public debt, freezing bank accounts and refusing to enact 
much-needed reforms.

Most international experts would agree with at least part of that analysis. 
But the American motivations are a good deal more tangled than that.

For one thing, a Brazilian collapse would be much more frightening. 
Brazil's economy is several times as big as Argentina's. Its external debt 
of $264 billion is more than double that of Argentina, and American banks 
like Citigroup, FleetBoston and J. P. Morgan Chase have much greater 
exposure to Brazilian loans than to Argentine ones.

Brazil has also been a big magnet for American industrial investment. 
General Motors and other car companies have sunk billions into factory 
expansions, and a Brazilian meltdown would turn those into white elephants.

It is unclear how much American banks and manufacturers lobbied for the 
Brazilian rescue plan, but they will certainly benefit from it. Shares of 
Citigroup and FleetBoston jumped 6 percent as soon as the markets opened 
today, long before the rest of the stock market began soaring to a large 

The Bush administration also had political and diplomatic reasons to 
reverse its prior stance of "tough love" when it came to Brazil.

The I.M.F. loan was carefully structured to affect Brazil's upcoming 
elections, in which two left-wing candidates are in the lead and had been 
threatening to reverse Brazil's free-market approach to economics and trade.

Most of the loan cannot be tapped until after the elections, and the 
left-wing candidates strongly implied today that they will continue the 
current belt-tightening budget policies in order to satisfy the fund.

President Bush's hope to negotiate a giant free-trade agreement that covers 
all of Latin America, made possible when Congress gave him negotiation 
authority last week, would have been crippled if Brazil were forced to 
default on its debt.

Brazilian leaders had already been balking at calls for a free-trade 
agreement and would probably have refused to embrace the talks if they had 
been denied aid.

"This was a case in which ideology ran into the wall of reality," said 
Lawrence Meyer, a former governor of the Federal Reserve Board who is now 
at the Center for Strategic and International Studies in Washington.

The real world reacted exuberantly to the news. Stock markets in Brazil, 
Chile and even Argentina jumped briskly. Brazil's battered currency, the 
real, strengthened nearly 4 percent against the dollar.

The political strategy seemed to pay off as well. Both of the two left-wing 
challengers in Brazil's presidential election, Luiz Inácio Lula da Silva of 
the Workers Party and Ciro Gomes of the Labor Front, said today that they 
would support the fund's loan program.


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