Truth in Media Global Watch Bulletins

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TiM GW Bulletin 98/10-3

Oct. 17, 1998

Wall Street's Conquest of Brazil Resembles Financial Scams in Asia, Russia

Brazil: From a Rising to a Shooting Star

By Prof. Michel Chossudovsky


PHOENIX - Exactly one year ago to the day, we made the following comment about the Latin American investments of "The Princes of the 20th Century," the multinational companies (see TiM GW Bulletin 97/10-6, 10/17/97):

"While pulling back in Europe, the U.S. companies seem to be tripping over each other to spend money in Latin America, especially in Brazil and Argentina. As a result, Latin America's in-take of the foreign capital surged by 52% in 1996 to $39 billion, a record high. The rate of increase was also the world's highest. As a result, Brazil has now surpassed Mexico as the largest Latin American recipient of foreign funds, having received nearly $10 billion in 1996 (vs. Mexico's $7.5 billion). The investments in Argentina tripled in 1996 to $4.3 billion."

How quickly things can change in a globalized economy. For the worse. One year later, yesterday's darling of international bankers - Brazil - is being savaged by the international "vulture capitalists." A rising star is turning into a shooting star. Like the Southeast Asian countries, Brazil took the bait and swallowed the hook of easy money. Now the Wall Street piranhas are nipping at this country of 160 million people as the International Monetary Fund (IMF) is dragging its latest catch to their shallow waters.

How can things like that happen? Well, capital flows can move about $1.3 trillion in one day, the equivalent of a full quarter's-worth of global trade in goods and services. This should give one an idea of the virtual economy's supremacy over the real economy, the Latin American Economic System (SELA) was told at its Sept. 25 meeting in Venezuela. Carlos Moneta, an Argentinian and the permanent secretary of SELA, told the InterPress Service that, "a transfer of power from national governments to financial markets has taken place, which erodes their (the national governments') response capacity, and hinders national development policies.''

Echoes of Malaysia prime minister's lashing out at the APEC (Asia Pacific Economic Community) conference in Vancouver, Canada, on Nov. 24, 1997? "Two decades of growth was wiped out in two weeks," Dr. Mahathir Mohamad lamented. "Vibrant economies have been reduced to begging for aid from the IMF." And that is "a recipe for slavery," he added.

True. But once a fish has swallowed the hook, it's too late for protests. All it can do is squirm and wiggle. Unless it manages to tears itself from the hook. By hook or by crook. That is the current situation in Brazil. To find out how Wall Street imperialists made this neo-colonial catch, we bring you the following contribution by Prof. Michel Chossudovsky of the University of Ottawa:

OTTAWA, Canada - A multi-billion dollar financial scam is in the making in Brazil. The IMF-sponsored operation is a "re-run" 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 foreign exchange 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. Its 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 elite. [TiM Ed.: Echoes of Russia?].

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 foreign exchange market. In other words, the Central Cank reserves have been looted.

Demise of Brazil's 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 G-7 countries. The Brazilian authorities have insisted that the country "is not at risk" and what they are seeking is "precautionary funding" (rather than a "bail-out") 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 U.S. 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 constituted a "dress rehearsal" for similar multi-billion 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 G-7 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, October 3, 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 privatization program. 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. three 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 privatization program (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 privatization 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, Impoverishment and Social Devastation

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 privatization program) are of the order of R10 billion ($8 billion).

In a country where more than half the population is already below the poverty line, the impacts of an the IMF bail-out 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 balkanized; as in Indonesia and Korea. Wall Street investment houses will be invited to "pick up the pieces".

Global Economic Crisis at Dangerous Crossroads

The social impact in Latin America, where the IMF sponsored structural adjustment program has been routinely applied for more than 10 years, is likely to be far more destructive than in Southeast Asia. While G-7 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 spiraled. 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 privatizations, 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 (already implemented in Russia and Southeast Asia) is to be inflicted upon Latin America's largest economies: Brazil, Mexico, Argentina and Venezuela. Washington's "hidden agenda" is to take over productive assets and recolonize the continent. [TiM Ed.: ...including North America].


Michel Chossudovsky is professor of economics at the University of Ottawa, Canada.


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Also, check out... "Brazil: From a Rising to a Shooting Star", "Argentine Judge Says Four IBM Execs Are Suspects", "Don't Cry for Me, Argentina", a Djurdjevic Feb/98 Integration Management (IM) column (IM is a Washington Post publication).