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Monday, 5 August, 2002, 15:23 GMT 16:23 UK
Brazil's looming economic crisis
![]() Panic hit the Sao Paolo trading floors as the real fell
In times of war, military medics give priority to patients according to their chances of a quick recovery and their importance to the war effort.
True, Brazil's economy has received a serious beating in recent weeks, with jittery traders hammering its currency, the real, to historic lows, and leading credit rating agencies raising questions about the country's ability to service its combined debts of more than $250bn. Yet, it is widely agreed that rescuing Brazil's economy is not only possible: It is also crucial if the battle against Latin America's financial crisis is to be won. External difficulties Central to Brazil's economic woes are the economic crisis that has hit its regional comrades Argentina and Uruguay which were next on Mr O'Neill's list of countries to visit.
But this does not mean that Brazil's problems are not real, nor does it mean that they are merely the result of trouble abroad. Soaring unemployment at home, to a two-year high, has been widely blamed on the government. This, along with other economic woes, has fuelled the popularity of the left winged Presidential candidate Luiz Inacio Lula da Silva ahead of elections in October. The support for Lula, as he is known, is based on a growing resentment towards unregulated market forces which critics say has failed to deliver growth and prosperity, having instead caused the gap between rich and poor to widen. Disgruntled investors Investors, on the other hand, dislike Lula intensely.
"The market's mistrust is not in the current economic policy but in the possible future economic policy," explained WestLB economist, Horst Schoenebonn. Such concerns have hit Brazil's stock and bond markets in recent weeks. And on 31 July, the concerns sent the real into a tailspin which took it to a historic low of 3.47 against the US dollar, before bouncing back by the end of the week. Local and global impact For the Brazilian people, the real's plunge was brought home by higher bread prices.
For the rest of the world, expensive bread in Brazil is merely an early symptom of what could become a major global headache. Not only is Brazil's economy twice as large as its crisis-hit neighbour, Argentina. It has also accounted for more than two thirds of all investment into Latin America. Brazil is also a major customer for producers in the industrialised world, given that the US, Europe and Japan all export about three times as much to Brazil as to Argentina. So whereas "global capital markets emerged relatively unscathed" when Argentina defaulted on its debts earlier this year, the "events unfolding in Brazil will have a much sharper impact on the global economy", the German bank, WestLB said in a research note. Crucial rescue The international community is therefore faced with a tricky dilemma. On the one hand, bailing out Brazil may seem an obvious thing to do given the disastrous consequences of failing to do so. But at the same time international lenders are loath to hand over more cash to already heavily indebted nations. Such concerns were, rather crudely, expressed by Mr O'Neill last month when he said that Brazil must enact sound economic policies "so that [aid] does some good and doesn't just go out of the country to Swiss bank accounts". But Mr O' Neill has since apologised and most observers have come to expect that the IMF will extend its current $16bn lending program to Brazil. But some see further clouds on the horizon. "We are sceptical of the chances of Brazil receiving any time soon a long-term agreement which would be sufficient to reduce the degree of uncertainty about the economic policies in the years to come," the UK-based bank HSBC said in a research note.
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28 Jun 02 | Business
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