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Global Viewpoint

Brazil’s lessons for indebted Europe

Some European nations' debt will have to be forgiven to resume growth. Those responsible for the financial turmoil must pay, rather than the poor. And Europe must unify its fiscal policy.

By Fernando Henrique Cardoso / October 11, 2011



São Paulo, Brazil

For those of us in developing countries who over the years became reluctant experts on the subject of financial crises, the latest wave of turmoil in the global financial system is, regrettably, not a surprise.

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In large part, the prescriptions and recommendations that so-called experts make today about the persistent problems in the rich world are exactly the same ones that were made in previous decades about countries such as Brazil. The difference is that, now, since the crisis is at the center and not at the periphery of the system, the global risks and repercussions are much bigger.

In the past, national officials – central banks and finance ministers – sought to vigorously demonstrate that there was no reason to compare their own country’s plight with the tragedy occurring in another. Their fiscal situation wasn’t the same; their percentage of debt to GDP wasn’t all that big; the internal debt was in the hands of domestic holders and denominated in local currencies; and so on.

But there was always one critical factor: foreign-exchange accounts. If capital flows stopped permitting the rollover of debt, the phantom of default would rear its head and often devour everything, condemning countries afflicted by the contagion to years of fiscal austerity and low growth.

During the 1990s and at the beginning of this century, seemingly every problem experienced by a poorer country (some of them not so poor anymore, since the term BRIC came into fashion) was met with the same prescription. The International Monetary Fund proposed drastic fiscal discipline, a reorganization of the state’s property via privatizations, greater openness to capital flows, new investments, and in the most severe cases, a restructuring of foreign debt, as happened with the Brady Plan [the 1989 reorganization of mostly Latin American debt].

The prescription, therefore, did not assure a smooth path to the return of growth. In order to grow again, it was necessary to lure foreign funds, but at the same time not expose oneself to the most fickle and volatile capital flows – what these days is called “hot money.” Easy to say; but in practice, it was very difficult to separate the wheat from the chaff. When the situation deteriorated to the point that foreign loans were necessary to cover balance-of-payment deficits, the situation often turned lethal.

What did those of us who ran these countries ask of the international community during these difficult times? We requested more and better international regulation in order to limit speculation against our currencies, the creation of funds that were bigger and more easily accessed, and for the IMF to be strengthened and simultaneously adjust its policies in favor of countries with liquidity crises.

To finance these funds, some of us returned to the idea of a Tobin tax, a levy on conversions of one currency to another. Finally, we argued that if budget austerity exceeded a certain limit, it would kill any hopes of a return to growth – not to mention make the sociopolitical situation in our countries unsustainable. Nobody listened to us, despite our continued requests. Countries that were in no condition to negotiate better terms with the IMF generally suffered through a long period without growth, with continued inability to pay their debts, and with social unrest.

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