*****FORWARDED MESSAGE***** Delivered-To: [EMAIL PROTECTED] Date: Thu, 14 Jan 1999 08:08:25 -0500 From: WK <[EMAIL PROTECTED]> Organization: COMER MIME-Version: 1.0 To: "COMER erMail (recipient list suppressed)" <[EMAIL PROTECTED]> Subject: ER9901-#3 SURPRISES IN THE HEAVENS AND ON EARTH =============== SURPRISES IN THE HEAVENS AND ON EARTH In the first week surprises were reported both in the heavens and on earth. With their most powerful telescopes, astronomers have found that some planets in remote solar systems do not move in the near-circular orbits in our own solar system. As a result they are asking whether this might indicate the existence of a sort of matter unknown to us and invisible to our telescopes. But while astronomers are weighing evidence come to them from thousands of light-years away, conventional economists are being surprised by what has always been right under their noses. What is baffling them in Brazil is an exotic something called "society" that had fallen through the cracks of their equations, but is now surfacing to mess up their forecasts. The Wall Street Journal (6/01) tells the tale: "Facing constant pressure to pay back a black market loan taken at the crushing rate of 10% a month, the old woman had finally cracked, poured alcohol on her body and set herself on fire. "Brazil's latest drive to preserve economic stability has brought a punishing interest-rate policy. Monthly charges of 6% on bank loans and 10% on credit cards have produced a rate shock that is claiming many victims. "While some businesses are profitting from the tough rate regime -- especially debt-collectors and loan sharks -- few individuals are so lucky. Many fail to read the fine print and suddenly find themselves trapped in a maelstrom of spiralling debt. One consolation: Support for debtors' rights is on the rise. On the macro side, high interest rates are taking a bite out of the national coffers without really sheltering the embattled currency -- the real -- the root of all these evils. "When financial speculators took aim at Brazil this past September, the central bank pushed the country's already lofty rates higher still to tempt investors to keep their savings in the real. The IMF and other lenders assembled $41.5 billion in emergency loans to Brazil last year to back the government's strategy." Temporary exchange controls would have defused the situation, but that is a no-no in the IMF's books, because it would undercut the lucrative games of international finance that the IMF mistakes for the world economy. As it is the $41.5 billion of foreign currency that the IMF marshalled to back Brazil's currency, was doomed to end up with the speculators, leaving Brazil with its foreign currency debt increased by that amount. So often has this scenario been played out since speculators in 1992 shot down the pound and a series of other currencies kept at artificial heights with interest rates, that by now the ploy should be known to schoolboys. The government whose currency is attacked draws on foreign loans arranged by the IMF, and turns over the foreign currency to buy back its own paper. The "assisted" country ends up with the foreign debt to the amount of the "aid" while the speculators pocket the proceeds of the loans, and move on to the next replay of the scam. "The government's benchmark interest rate is a hefty 29% a year. But after banks, retailers and credit-card companies slap on their stupefying spreads -- partly to fatten profits but also to compensate for a record number of defaults -- the final rate for consumers can reach 150% to 250% a year. And the blow to the consumer is not cushioned by high inflation and devaluation: stable consumer prices are the major triumph of the currency policy. "Manufacturers, finding financing prohibitively expensive, have slashed capital spending to half its level of the 1980s. That has helped drive unemployment in greater Sao Paolo, the country's industrial center, to more than 17%. One of the few growth industries in Brazil today is debt collection. The main player is a huge but secretive company, Grupo Union, which has averaged 35% annual revenue growth over the past three years. "Debtors are trying to fight back. Brazil's rapidly growing debtors-rights movement got started 18 months ago when clothing-shop owner Marcelo Salvato contracted a $5,000 debt that tripled within only a matter of months. Rebuffed when he tried to renegotiate with his bank, he took to the streets to recruit other debtors interested in clogging the courts with suits against creditors. In almost no time his National Debtors Association has grown to 10,000 in two dozen cities. "Amidst all this ferment, the high interest rates are failing to achieve their primary purpose: assuring investors of the soundness of the real. Brazil lost about $5 billion in hard-currency reserves in December, in part because investors are worried that scorching rates could push the government itself into insolvency. Currency reserves now stand at about $37 billion, not including the $41.5 billion the IMF and other lenders are making available. "Last month, Sao Paolo industrialists, largely heads of family-owned companies, formed an unlikely alliance with labour unions to demand that the government shift directions by lowering interest rates and providing more protection against imports. A radically different prescription came from a top conservative politician in the governing coalition. He urged President Cardoso to shore up market confidence with bolder market reform, including the privatisation of the state-run oil company, Petroleo Brasileiro, S.A. "In the meantime, high rates are beginning to erode the benefits of the [new currency] introduced 4 ½ years ago. It had reduced annual inflation from 2,700% in 1993 to 1.5% last year and fostered productive investment after decades in which Brazil had been a speculator's paradise. But as banks once again shift assets to high-yield government debt, the share of loans as a percentage of assets, around 25%, has fallen to a lower level when the real was launched. Interest payments on government debt are crowding out public investment in health and education. The federal University of Rio has struggled even to pay its utilities." The WSJ (11/01) informs us that "some US and European banks are trimming their overall Brazilian lending and changing their credit mix to an increasingly cautious stance. Brazil's newly privatised telephone and electric companies are likely to soak up much of the remaining credit, since they have large foreign companies as stakeholders." "Retail executives have been singled out as prime targets for kidnappers. That's partly because of the perception that eye-popping interest charges have made them fabulously wealthy, but also because kidnappers seem to regard them as more accessible than bankers or other types of lenders. "After a big shakeout a few years ago, Brazilian banks have navigated smoothly enough through the high interest storm. Bank consultant Carlos Daniel Coradi grumps: 'Any bank that fails in a country where it can earn 29% a year investing in government paper, deserves to go out of business.'" In short, everything is getting back to where it was before the "reform" medicine was applied, except that the country is strapped with a further burden of foreign debt, living conditions for the bulk of the population have become unliveable, and foreign takeovers of infrastructures are absorbing much of the available financing. * * * That pattern is not confined to Brazil. Mexico, the first to feel the joys of liberalisation by murderous interest rates, is also getting back to square one. "A burst of inflation threatens to wipe out the modest gains in purchasing power enjoyed by Mexican workers during the past year and a half. It could also undermine the economic stability that has been President Ernesto Zedillo's biggest achievement after four years in office. Inflation had fallen steadily from an annualised peak of 40% in 1995 until it levelled off at just under 15% in the middle of last year. Since October, however, it has risen anew, ending 1998 at 18.7%. (WSJ, 11/01) "The latest round of price rises was spurred by the government's long-expected liberalisation of the price of corn flour, the chief ingredient in tortillas. Previously subsidised, tortillas can be sold at free-market prices, though the government is leaning on retailers not to let prices rise too quickly. At the same time, a range of new fuel taxes, including a new 5% levy on diesel announced Dec. 31, has raised costs for everyone from transport companies to bath houses. 'The politicians ought to come down to the market and see what this is doing to common people,' says Adan Bautista, a member of the Metropolitan Transportation League, a truckers' cooperative. 'With these higher costs [for fuel], we have to charge more which means people will have to pay more for their food.' Friday, the head of Cancar, Mexico's leading transport organisation, announced it would be raising hauling charges between 17% and 20% through the coming year." Much of the renewed "inflation" is not even catch-up for the 40% plus cut in living standards for the poor and middle classes. It is driven by new taxes to achieve the budgetary conditions of the IMF. That, however, is lost sight of. "'If the central bank hopes to hit its inflation targets, they'll have to restrict monetary policy even further,' independent economist Jonathan Heath says. 'And I don't think the political will is there.' "Many in the business community see slightly higher inflation as a lesser evil than more restrictive interest rates, already at 33% for interbank loans." =============== Copyright (C) 1999 COMER. May be reproduced with proper acknowledgement. "Economic Reform" is the monthly journal of the Committee on Monetary and Economic Reform (COMER), a Canada-based publishing think-tank. COMER Publications 3284 Yonge Street Suite 500 Toronto ON M4N 3M7 (416) 486-4686 Fax 486-4674 mailto:[EMAIL PROTECTED]
