Rainy Days in Brazil

By Charles P. Alexander

Foul weather and foreign creditors besiege a troubled nation

Once again last week, Brazil was at the brink. Part of its enormous $90 billion foreign debt was coming due, and the country had no way to pay. A team of tightfisted negotiators from the International Monetary Fund was in the capital city of Brasilia demanding that in exchange for new loans the government had to curb its spending and cool inflation, which reached an annual rate of 180% during the first half of the year. Meanwhile, Brazilians, incensed by austerity measures already taken, were striking and taking to the streets.

As if that were not enough, huge parts of southern Brazil, hit by weeks of torrential rains, were under water. The floods have destroyed at least 1 million tons of stored grain, drowned herds of cattle, brought business to a standstill, left 340,000 people homeless and killed more than 100 in an area that generates roughly 18% of Brazil's gross national product. Said one pilot after a rescue mission: "The region is one immense lake with little islands where there used to be cities." With damages so far estimated at $1.5 billion, the military government of President Joao Figueiredo set up a calamity fund for flood victims.

The government, though, is financially strapped. It could not make a $400 million loan repayment due late last week to the Bank for International Settlements, which serves as a kind of central bank for the central banks of major industrial countries. BIS had twice postponed the deadline for this payment, but announced that it would give Brazil no more time. The BIS pronouncement was obviously designed to pressure Brazil into coming to terms with the IMF for additional loans.

The Brazilians had another reason to wind up the talks with the IMF quickly. President Figueiredo, who has a history of heart disease and had been suffering chest pains, had made plans to fly to the U.S. last week for a checkup and a possible bypass operation at the Cleveland Clinic Hospital.

Figueiredo made a dramatic appearance on Brazilian television Wednesday night. Admitting that "nature is being cruel to us" and that "the economy is ill," the President prescribed a shock treatment to reduce inflation. He decreed that beginning in August, cost of living wage hikes for all Brazilian workers would be limited to only 80% of increases in the consumer price index. In addition, increases in rents, mortgages and other payments tied to inflation would be subject to the same 80% cap.

After the President's speech, IMF officials praised his new austerity program. At week's end Brazil and the IMF negotiators were putting the final touches on a preliminary agreement clearing the way for additional loans that would save the country from default. Backing down from its earlier demand, the BIS announced that it could wait for its $400 million until Brazil had new IMF money. Confident that the immediate financial crisis was past, Figueiredo jetted away to keep his doctor's appointment in the U.S.

Even before the President's announcement, Brazilians had been anticipating wage cutbacks. Over the past two weeks, workers have staged a string of strikes, including an illegal six-day walkout by 1,350 employees at two state oil refineries. It was the first work stoppage in the crucial energy industry since a military coup ousted the last elected civilian government in 1964. In Rio de Janeiro, 30,000 protesters marched; many waved placards urging the government not to surrender the nation. After Figueiredo's speech, which seemed to confirm the public's fears, Joaquim Dos Santos Andrade, president of the Sao Paulo Metalworkers Union, said: "This is the best way to throw more wood onto the fire." A coalition of 31 metalworker unions called for a one-day nationwide strike this week.

Much of the anger was directed toward Brazilian Planning Minister Antonio Delfim Netto, whom many Brazilians hold responsible for their economic troubles. Amid calls for his ouster, Delfim seemed confident last week that he would keep his post. He told a reporter to "write down this headline: 'The crisis continues and so does Delfim.' "

In all, Brazil faces scheduled payments this year of $13.8 billion in interest and principal, far more than the country can raise without new credit. A $10.2 billion emergency loan package put together in February by the IMF and Western commercial banks came unraveled because the Brazilians did not meet all the agreed-upon conditions. Though they curbed imports enough to come very close to a target $3 billion trade surplus for the first half of the year, they failed to slow inflation and government spending. As a result, the IMF and the banks in May suspended the flow of loan money. Since then, Brazil has fallen more than $1 billion in arrears on its debt payments.

Brazil's leaders have come to recognize that one of the main causes of the country's problems is its indexation system, which makes inflation difficult to cool off once it heats up. The program unveiled last week is the first major step toward dismantling that system. In the past, price rises have led to automatic hikes of comparable size in wages, pensions, interest rates and other payments. When indexation went into general use in 1973, government economists thought it would insulate people from the worst effects of inflation. The problem, however, was that unusual price hikes caused by temporary food or energy shortages, for example, were built into wages. Instead of remaining stable, the inflation rate tended to accelerate uncontrollably. The price index in Brazil has become almost like a clicking meter in a speeding taxicab, and the value of the cruzeiro against the dollar falls by 2% or 3% every week. Late last week it took 568 cruzeiros to buy a dollar.

While indexation fans Brazilian inflation, one root cause of rising prices is excessive government spending. State-owned companies, which are involved in everything from energy to real estate and generate roughly two-thirds of Brazil's economic output, have become bloated and inefficient. In the past decade their expenditures have more than doubled, even after adjustment for inflation. Under pressure from the IMF, Brazil has agreed to cut the budgets of state-owned companies by 3% and to slash their capital spending by 20%.

Brazil has a long way to go before recovering its economic health. Buffeted by the global recession, the country has been suffering for two years. Since 1980, the per capita gross national product has declined by 4.4%. In the first quarter of this year, retail sales dropped by 13.3% in Rio de Janeiro and 10.3% in Sao Paulo. Factories that produce construction equipment and other capital goods are operating at only 20% of capacity, and 8.5% of the country's workers have been laid off. Of the entire working-age population, 40% is either unemployed or working part-time at marginal, unskilled jobs like selling fruit on the streets.

The downturn has stoked social unrest in a country already notorious for its extremes of wealth and poverty. Half the population receives only 12.6% of the national income. By contrast, the richest 10% get 51% of the income. Most laid-off workers are receiving no more than one month's severance pay, and the government provides no unemployment benefits. In April, thousands of laid-off metalworkers shouting, "Queremos empregado!" (We want employment), stormed through the streets of Sao Paulo, looting shops and supermarkets.

In Rio de Janeiro, where luxurious, marble-walled apartment houses with rooftop gardens overlooking Ipanema and Copacabana beaches are flanked by squalid hillside shantytowns, crime is on the rise. Armed robbers often overpower apartment doormen at night and wait to ambush residents returning from evening parties. Bandits jump on buses and force passengers to hand over wedding rings and to empty their wallets and even shoes, where some people hide large bills. The rich are becoming fearful and cautious. At an exclusive dinner in Sao Paulo given for Antonio Gebauer, a senior vice president with New York's Morgan Guaranty Trust Co., one of Brazil's major creditors, 21 security guards were spotted among the guests, in corridors outside the room and on the roof of the building.

The hard times came as a shocking setback to a country that only a few years ago was one of the most dynamic developing nations. After the Brazilian army seized power in 1964, the generals signed up European-and U.S.-trained technocrats. Borrowing billions from abroad, the government made huge investments in roads, dams, rural electrification and heavy industries such as steel and petrochemicals. For a while, the strategy worked spectacularly. Between 1968 and 1980, economic growth averaged 9% annually.

But the economy gradually got out of control. Government spending became too lavish. Subway systems under construction in Rio de Janeiro and Sao Paulo, which have absorbed $2.1 billion so far, are the most expensive per mile in the world. Runaway deficits led to more and more foreign borrowing and fueled relentless inflation, which already averaged 20% a year in the early 1970s. When the global energy crisis hit in 1973, Brazil was overextended and vulnerable. Over the next six years, the country had to pay $35 billion, all of it borrowed, for oil imports.

Brazil is still a country rich in resources. Since the mid-1970s, huge new deposits of iron, manganese, nickel, copper, bauxite and gold have been discovered deep in the Amazon basin. To exploit this mineral wealth, the Brazilians have launched a mammoth development scheme, called the Carajas Project, that includes dozens of mines, a 550-mile railroad and a giant dam on an arm of the Amazon, all to be completed by 1990. The cost will be staggering: $61 billion. But the eventual income from the project, estimated at $14.6 billion annually, may be worth the initial expense.

Only 121 million acres, or about 10% of Brazil's arable land, is used to grow crops. Over the next three years, the Brazilians hope to plant 2.5 million more acres with wheat, sugar cane, soybeans, rice, vegetables and fruit. Tens of thousands of poor farmers are moving into the fertile but undeveloped cerrados savannah region in the central plateau. In one area, the government is giving away 1,250 acres to each of 150 homesteaders.

Fully developing Brazil's natural resources will take more time and money, two things in short supply as long as international creditors are besieging the country. Even if the IMF comes through with more loans, they will be only a stopgap. Brazilian officials are convinced that the only salvation is a fundamental restructuring of their debt. The average maturity of most loans was eight years, and 22% of the debt was due this year. The bulk of this load must be replaced, the experts argue, with long-term credit stretching over 15 to 20 years at reduced interest rates.

The main problem with a stretch-out of Brazilian loans is that it would be followed by pleas from other debt-laden countries, including Mexico, Poland, Argentina, Chile and Nigeria, for similar concessions. Brazil's difficulties are only part of a much larger global pattern, and the major creditor and debtor nations have yet to come up with a coherent long-range plan to ease the debt burden that is crippling the world economy. So far, temporary IMF bailouts on a case-by-case basis have only kept the international financial system lurching from crisis to crisis.

The industrial nations are asking the developing countries to slow growth in order to control their economies so that they can pay back part of their huge debts. But the Brazilians are increasingly unwilling to accept those conditions. Says Joao Camilo Pena, Minister of Industry and Commerce: "If the IMF gives the same medicine to all debtor nations, they will all perish from the cure." As last week's strikes and protests dramatically demonstrate, solutions to the debt dilemma that require stern sacrifices could be a formula for political chaos.

--By Charles P. Alexander.

Reported by Charles Thurston/Sao Paulo and Frederick Ungeheuer/Brasilia

With reporting by Charles Thurston, Frederick Ungeheuer This file is automatically generated by a robot program, so viewer discretion is required.