Brazil's foreign debt
It is time to face some painful realities in Brazil. This is the country with the world's largest foreign debt - more than $90 billion. It is $3 billion behind in interest payments. Forget about the principal. It is also the biggest country in Latin America, both in land area and population.Skip to next paragraph
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Last spring the International Monetary Fund (IMF) and a group of commercial banks suspended disbursement of a rescue package of new loans. Without these, Brazil simply does not have the foreign exchange to continue payments.
The rescue package had been painstakingly put together based on the conditions that Brazil would take strong steps to reform its economy and especially to control its inflation, which has been running at about 100 percent a year.
The political outcry against these measures became too much even for Brazil's authoritarian military government to bear, and so the government began to fall short of compliance with the IMF goals. When the IMF blew the whistle on further disbursements, Brazil in turn suspended its interest payments.
Negotiations between Brazil and the IMF resumed, but encountered the same intractable political opposition. When the Brazilian National Congress balked at approving the IMF conditions, the government declared a state of emergency and proclaimed them anyway. It may or may not make this stick.
However, Brazil's international financial distress is due less to its economic policies than to higher oil prices and the worldwide depression, which reduced its exports.
Brazil went through a similar round of acrimonious negotiations with the IMF in the 1950s. That decade was also marked by friction with the United States. The Eisenhower administration steadfastly refused to extend credits from the Export-Import Bank or other public sources to Petrobras, the Brazilian government oil monopoly. The argument was that if Brazil would only open its oil industry to private enterprise, it would attract so much private investment that it would not need government credits.
The Brazilians did not see it that way. They did not trust international oil companies. There are Brazilians who believe that American geologists hired by Petrobras deliberately kept oil discoveries secret so that the companies could come in later and exploit them. This may be far-fetched, but in any event Brazil has never been thoroughly explored for oil. Nobody knows how much there is, or where. It may be that if there had been adequate exploration, Brazil would not now need to import so much and borrow so much money to pay for it.
American governments of both parties have long relied on the IMF to foist orthodox economic policies on countries in such dire straits that they have no alternative. The lesson of the still-unfolding Brazilian story seems to be that even the IMF has to recognize the reality of political constraints. For most of the last 30 years, Brazil has experienced feverish economic growth and suffered grievous inflation. By the late 1970s, it was approaching the status of a middle power in the world - comparable, say, to Spain or Greece. But the benefits of this growth were not widely shared. The rich got richer and the middle class increased, but there are more poor people now than ever - and they are suffering more.
The austerity demanded by the IMF would fall disproportionately on the poor. There is already looting of grocery stores in Rio de Janeiro. Patience is a Brazilian national characteristic, but it is not unlimited. One trembles over the implications of a Brazilian social upheaval.
Meanwhile, the IMF itself is out of money. A bill to increase the US contribution - which would also jar loose more contributions from other countries - is stalled in Congress. The reasons are complicated, but one of them is objection to bailing out commercial banks from the consequences of their own imprudent loans.
Suppose, however, that either because the IMF's conditions are politically unacceptable or because the IMF runs short of resources, Brazil is forced to default on its international debt. Suppose thousands of creditors worldwide go into court to protect themselves by attaching every Brazilian ship, aircraft, and coffee bean. Suppose $90 billion worth of loans suddenly become worthless or nearly so. The worldwide economic shock would be comparable to what happened in 1930.
The Congress would really have to bail out the banks. And the quarrel over economic policy would seem trivial indeed.