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Brazilians Uneasy Despite Help by IMF

Larry Rohter.
Produced by
The New York Times

RIO DE JANEIRO, Aug. 5 — The $15 billion in loans that the International Monetary Fund unexpectedly offered Brazil on Friday puts some distance between this country and its troubled neighbor Argentina. But the deal is likely to fall short, financial analysts here predicted this weekend, of establishing the foolproof fire wall from the troubles next door that Brazil has been seeking.

The monetary fund's latest support plan for Brazil is a result of a deepening recession in Argentina and of growing fears that the government there will default on $128 billion in debt.

The events of 1997 and 1998, when a financial crisis in Asia spread to Russia and eventually forced Brazil to devalue its currency by 40 percent, are still fresh in investors' minds. And so the action is intended to calm fears of a "contagion" that would spread from one afflicted economy to all developing nations.

In announcing the new loan package late on Friday, after markets here and in the United States had closed, the fund's managing director, Horst Köhler, was careful to distinguish Brazil's situation from Argentina's.

He praised what he called "Brazil's strong track record" and lauded the Brazilian authorities for "strengthening fiscal and monetary policies and implementing their structural reform agenda in the face of a difficult external environment."

That ringing endorsement for the world's eighth-largest economy promises to calm, at least temporarily, the stock and foreign exchange markets here, both of which have been buffeted in recent months by spillover from the crisis in Argentina.

Since February, for instance, the value of Brazil's currency, the real, has fallen by nearly 25 percent against the United States dollar, closing on Friday at 2.505 to the dollar.

The timing of the agreement and, above all, the rapidity with which it was reached, came as a surprise to many here. Brazil signed a $41.5 billion accord with international lenders in November 1998. But that agreement expires on Dec. 1, and President Fernando Henrique Cardoso said several times earlier this year that it would not be necessary to renew it.

But late in July, with Argentina's situation worsening, Armínio Fraga, the president of Brazil's Central Bank , made a quick trip to Washington, where he met with officials of the monetary fund.

At the time, I.M.F. and Brazilian officials characterized the contacts as just preliminary consultations and indicated that the process of negotiating a new agreement, should one be needed at all, might take several months.

"With things unraveling in Argentina, it appears that both sides decided they had no time to waste," a diplomat here said this weekend. "Any delay was only going to feed uncertainty in the markets and make things worse."

The sudden announcement of the standby credit line for Brazil was not the only move the monetary fund made on Friday in an effort to calm markets.

The fund also said it would lend $1.5 billion to Turkey, another developing country that has been shaken by economic woes, and accelerate a $1.2 billion disbursement to Argentina. But it offered no additional money to supplement the $40 billion package that Argentina negotiated with international lenders late last year.

In Buenos Aires, John Taylor, the United States under secretary of the Treasury, held two days of talks with Argentine officials late last week. Argentine officials said afterward that the Bush administration understood the nation's financial problems and supported austerity moves to trim the deficit by at least $1.5 billion this year.

Officials also told local newspapers that they were confident that the United States and other economic powers would agree that I.M.F. payments to Argentina would be accelerated to assure that it could meet its debt obligations for the months to come.

Though much is made of the contagion effect of the Argentine crisis, Brazil trades much more with Europe and the United States than it does with Argentina or its other partners in Mercosur, the South American common market.

In recent years, with the world economy booming, Brazil has received as much as $30 billion in new foreign investment annually. Even more than the funds obtained in the 1998 rescue package, that money has helped Brazil reduce its current account deficit and meet the targets that it promised the monetary fund it would fulfill.

During the first half of this year, in contrast, Brazil received only $9.9 billion in direct foreign investment, according to Central Bank statistics, compared with $13.4 billion during the first half of last year.

The Brazilian government has already reduced its estimates of such capital inflows for this year, from $24 billion to $20 billion, but it may be forced to lower them even further if the United States and Europe plunge into recession or their nervousness about Argentina continues.

In recognition of that situation, the bulk of the package from the monetary fund consists of a $12.5 billion "supplementary reserve facility" that the fund's statement described as a purely "precautionary" measure. Officials indicated this weekend that the money would be used only if Brazil encountered problems in its balance of payments this year or next, after which the new accord is scheduled to expire.

Reaction to the agreement has been muted here so far, in large part because no one outside the government knows the terms of the accord yet. The announcement of whatever new commitments Brazil has made to hold the public deficit and inflation in check is expected to come this week, but everything points toward continued austerity.

With the country heading into a presidential election year, any additional cuts in government spending and investment would probably strengthen the appeal of the left- leaning opposition, some parts of which are opposed to dealings with the monetary fund and support a moratorium on repayment of Brazil's foreign debt.

In addition, Brazil's 170 million people have been living with rationing of electricity since June as the result of a drought and lack of investment in energy production.

The government has promised an expensive crash program to build new dams and power plants, but Brazilian newspapers this weekend have been asking whether the government will still be able to meet those commitments.

Nor does the latest loan "alter the structural and fiscal weakness from the recession that is unveiling itself" here, the daily Folha de São Paulo noted in an editorial published on Saturday. "If I.M.F. support is seen as a necessary condition to avoid a deeper crisis, then this support is far from being sufficient."

(c) Copyright: The New York Times

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