From: "Janet M. Eaton" <[EMAIL PROTECTED]
"The global crisis has reached a dangerous crossroads as speculators
and creditors extend their grip into Latin America: the IMF sponsored
financial scam (implemented in Russia and Southeast Asia) is to be
inflicted on Latin America's largest economies: Brazil, Mexico,
Argentina, and Venezuela. Washington's "hidden agenda" is to take over
productive assets and recolonise the continent."
--- Prof. Chossodovsky, Oct. 1998
THE BRAZILIAN FINANCIAL SCAM
October 1998
by Michel Chossudovsky, Professor of Economics, University of
Ottawa, author of THE GLOBALISATION OF POVERTY, Impacts of IMF
and World Bank Reforms; Third World Network, Penang and Zed
Books, London, 1997. (The book can be ordered from [EMAIL PROTECTED])
Copyright by Michel Chossudovsky Ottawa 1998. All rights reserved. This
text can be posted and/or forwarded. To publish or reproduce in printed
form, contact the author at fax: 1-514-4256224, E-mail:
[EMAIL PROTECTED]
IN BRAZIL a multibillion dollar financial scam is in the making. The
IMF sponsored operation is a rerun of last year's speculative raids
on Southeast Asia which led to the confiscation of more than 100
billion dollars of hard currency reserves. On Friday September 11th
amidst turmoil on the Sao Paulo stock exchange, some 1.7 billion
dollars had quietly left the country in a single day. In October, the
pace of capital flight (funneled through the forex market) was
running at the pace of 400 million dollars a day.
The vaults of the Central Bank of Brazil were being ransacked by
"institutional speculators" with the tacit collusion of the
government of President Fernando Henrique Cardoso. The Brazilian
authorities stood idle: on instructions from their Wall Street
masters, no exchange controls were to be instituted to mitigate the
outflow of money wealth. In the words of Brazil's Finance Minister
Pedro Malan, restrictions on capital movements are counterproductive
and would be conducive "to all sorts of corrupt practices." (Jornal
do Brasil, 5 October 1998). Instead, short-term interest rates had
been artificially boosted to 50 percent with a view to upholding
Brazil's ailing currency. (The exchange rate under the real-dollar
peg varies between an upper and lower level). According to J.P.
Morgan in Sao Paulo, the cost of the interest rate hike to the
country (in terms of added debt servicing obligations) is a
staggering 5 billion dollars a month. (Financial Times, 18 September
1998). It was a massive sellout: rather than curbing the flight of
capital, the structure of high interest rates had contributed to
heightening the debt burden, not to mention the devastating impact of
the credit squeeze on domestic producers. The country is facing
imminent bankruptcy; the State apparatus is under the control of
Brasilia's external creditors. Moreover, Brazil's internal debt had
almost doubled in less than six months, increasing from $145 billion
in January to $254 billion in July (of which $45 billion are due in
October)...
Wall Street calls the Shots
The same Wall Street money-managers who decide Brazil's macro-
economic agenda are major speculative actors well versed in the art
of market manipulation. It is a modern form of highway robbery: since
July 1998, 30 billion dollars have been taken out of Brazil. The loot
has been transferred into the private coffers of Western banks and
into the overseas dollar accounts of Brazil's financial elites.
This confiscation of the nation's hard currency reserves is the
result of political manipulation. The speculators knew that the
currency would be devalued after the October presidential elections.
They had already converted their Brazilian reales into dollars using
the forward foreign exchange market. The conditions enabling the
outflow of the country's hard currency reserves had been carefully
worked out by the IMF and the government of Fernando Henrique Cardoso
in consultation with the world's largest commercial banks and
brokerage houses. The central bank was to uphold the Brazilian real
by massively selling dollars in the forex market. In other words,
central bank reserves have been looted. The reserves are being
privatised...
Demise of the Central Bank
This process marks the demise of Brazil's central bank. Brazil's
foreign currency reserves have fallen from $78 billion in July 1998
to $48 billion in September. And now the IMF has offered to "lend the
money back" to Brazil in the context of a "Korean style" rescue
operation which will eventually require the issuing of large amounts
of public debt in G7 countries. The Brazilian authorities have
insisted that the country "is not at risk" and what they are seeking
is "precautionary funding" (rather than a "bailout") to stave of the
"contagious effects" of the Asian crisis. Ironically, the amount
considered by the IMF (30 billion dollars) is exactly equal to the
money "taken out" of the country (during a three month period) in the
form of capital flight. (See Peter Muello, "IMF Support Lifts Brazil
Economy", Associated Press, 9 October 1998.) But the central bank
will not be able to use the IMF loan to replenish its hard currency
reserves. The bailout money (including a large part of the $18
billion US contribution to the IMF approved by Congress in October)
is intended to enable Brazil to meet current debt servicing
obligations - i.e., to reimburse the speculators. The bailout money
will never enter Brazil.
Behind the Scenes Negotiations
The Southeast Asian bailouts constitute a "dress rehearsal" for
similar multibillion schemes to be adopted in Latin America's largest
economies. During the annual meetings of the IMF and the World Bank
in October, behind the scenes discussions were held between Brazil's
Minister of Finance Pedro Malan and William Rhodes, Vice-President of
Citibank representing Brazil's external creditors. Ironically, these
negotiations were being held at a time when G7 leaders, anxious to
appease public opinion, had called for controls on short-term capital
movements. As ministers of finance were meeting behind closed doors,
the representatives of some 300 global banks had gathered in parallel
sessions under the auspices of their Washington think tank, the
Institute of International Finance. The global banks were inviting
the IMF "to sharpen [rather than soften] its techniques of
surveillance" as well as strengthen its collaboration with the
private financial sector. (See Dr. George Blum, Chairman of IIF,
Opening Statement, Press Conference, Institute of international
finance, Washington, 3 October 1998.)
President Fernando Henrique Cardoso had already signed a "Letter of
Intent" which commits the Brazilian authorities to massive austerity
measures. The latter will require substantial layoffs of federal
government employees as well as a curb on transfer payments to the
state governments. In the words of Demosthenes Madureira de Pinho
Neto, the Central Bank's director of foreign operations: "the budget
adjustment will be dramatic, definitive, and permanent." To "restore
business confidence" (according to a representative of Goldman
Sachs), Brazil must implement "an overshoot on fiscal adjustment"
(well beyond the austerity package imposed by the New York banking
committee in 1994 under the Real Plan). The "economic therapy"
required to restore "the faith and trust" of foreign investors will
result in further bank failures and mass unemployment.
Under the Presidency of Fernando Henrique Cardoso, the creditors are
in control of the State bureaucracy, of its politicians. The State is
bankrupt and its assets are being impounded under the privatisation
programme... The Real Plan initiated in 1994 - with the blessing of
Brazil's Wall Street creditors has reached a dangerous turning point.
A new lethal phase of economic and social destruction has commenced:
to ensure the swift payment of debt servicing obligations, the IMF
will require cuts in the budget deficit of the order of 20 billion
dollars (ie. 3 percent of GDP) to be implemented in the immediate
aftermath of the elections.
Large portions of the national economy will be put on the auction
block. The privatisation programme (envisaged under the Real Plan)
will be speeded up: public utilities including State telecom and
electricity companies are to be sold off at bargain prices to foreign
capital. The federal government has also envisaged legislation which
will allow for the privatisation of municipal water and sewerage.
However, the modest proceeds of these sales will only enable Brazil
to meet a fraction of its debt servicing obligations.
Renewed Inflation
Currency devaluations in the aftermath of the elections will trigger
an inflationary spiral leading to a further collapse in the standard
of living. Substantial increases in sales taxes required under the
bailout will also contribute to compressing real purchasing power.
The proposed hikes in State revenues (to be raised largely from
higher levels of taxation and the proceeds of the privatisation
programme) are of the order of R10 billion ($8 billion).
Impoverishment and Social Devastation
In a country where more than half the population is already below the
poverty line, the impacts of an the IMF bailout will be devastating.
Large sectors of Brazil's population of 160 million people will be
driven into abysmal poverty. Entire regions of the country will be
pushed into recession. The central government will be weakened: with
the impending fracture of the federal fiscal structure, State
governments will be left to their own devices. The country's regions
will become increasingly balkanised; as in Indonesia and Korea, Wall
Street investment houses will be invited to "pick up the pieces."
The Global Economic Crisis at a Dangerous Crossroads
The social impact in Latin America (where the IMF sponsored
strucutral adjustment programme has been routinely applied for more
than 10 years) is likely to be far more destructive than in Southeast
Asia. While G7 leaders have formally acknowledged some of the
shortcomings of the IMF's interventions, the application of "strong
economic medicine" is still part and parcel of the Latin American
agenda. In recent months, currency devaluations have swept the
continent. In Mexico, exacerbated by high interest rates, the
internal debt has spiralled. In Peru, a general strike in October -
in protest against the IMF sponsored reforms of President Alberto
Fujimori - was brutally repressed by units of Army. In Argentina, the
central bank already operates as a de facto "currency board" under
the guidance of its external creditors. In a new wave of IMF
sponsored privatisations, Argentina's largest commercial banks are
being liquidated and sold off to foreign investors at bargain prices.
The global crisis has reached a dangerous crossroads as speculators
and creditors extend their grip into Latin America: the IMF sponsored
financial scam (implemented in Russia and Southeast Asia) is to be
inflicted on Latin America's largest economies: Brazil, Mexico,
Argentina, and Venezuela. Washington's "hidden agenda" is to take
over productive assets and recolonise the continent.
Michel Chossudovsky
Department of Economics,
University of Ottawa,
Ottawa ON K1N 6N5
Voice box: 1-613-562-5800, ext. 1415
Fax: 1-514-425-6224
E-Mail: [EMAIL PROTECTED]
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