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Is Brazil next?
Abstract
Until the IMF package on August 7, the financial markets showed great concern that Brazil might follow Russia, Ecuador, the Heavily Indebted Poor Countries, and Argentina in defaulting on its public debt. The yield spread of Brazilian debt over US Treasury securities ("Brazil risk") rose above 2,000 basis points in July 2002, on somedays higher than that of Nigerian debt, and second only to Argentina. One of my colleagues, Morris Goldstein, publicly estimated the probability of a Brazilian debt restructuring before the end of 2003 to be as high as 70 percent. After that (though not necessarily as a consequence!) the Brazilian real depreciated a lot more and Brazil risk rose much more. The questions addressed in this brief are whether this pessimism about the prospects of Brazil was justified, and whether the new IMF program announced on August 7, 2002, promises to bring these fears to an end once and for all.
... ..can [investors] be certain that a Brazil run by a president with a past record of sympathizing with default will not take the easy way out?" In the article from which this quote was taken, Williamson (2002) argued that fundamentals were sound; primary fiscal surpluses had been raised substantially, and budget constraints hardened for the state governments. Additionally, the real had been floated in 1999. ...
... For example, Eichengreen and Ruhl (2000) argued, in the context of Ecuador, Pakistan, Romania, and Ukraine following the East Asian and Russian crises, that IFIs acted to avoid "a costly, extended interruption to market access" and were therefore not credible when they sought to impose haircuts on private creditors. 37. Williamson (2002) was partly responding to an estimate by Morris Goldstein that there was a 70 percent chance that Brazil would be forced to restructure its debt by the end of 2003. See Goldstein (2003) and the excellent overview in Giavazzi, Goldfajn, and Herrera (2005). ...
An orderly sovereign debt restructuring should place the debtor nation's public debt on a sustainable trajectory while minimizing
procrastination and contagion. However, the experiences with the debt crisis of the 1980s, Russia 1998, Argentina 2001, and
Greece 2010 indicate that orderly debt restructurings remain elusive, even with high-powered official intervention. When solvency
problems are present, the chances of success increase if official money is lent at the risk-free rate, reflecting its low
risk, and if private creditors receive an upfront haircut. The paper examines the obstacles, which include moral hazard, difficulty
in distinguishing between solvency and liquidity crises, and the “political economy” resistance to upfront haircuts. Orderly
sovereign debt restructurings are likely to remain elusive notwithstanding recent evidence that the official mindset may be
changing.
... This is what almost happened to Brazil in the run-up to the 2002 elections: When it became clear that the left wing candidate Luiz Inácio Lula da Silva might win the presidential election, interest rates rose so much that servicing the debt became almost impossible (seeWilliamson 2002). Only a record loan from the International Monetary Fund was able to calm the markets ...
This article studies regional cyclical divergences in the European Monetary Union that have recently fuelled political debates on a break-up of the eurozone. It identifies two country clusters (the stagnation-and-low-inflation-countries and the growth-and-inflation-countries) and situates Italy along with Portugual in between the two groups. These cyclical divergences do not reverse in the EMU as quickly as text-book models have predicted, because financial and labour markets react with less flexibility than expected. The authors suggest an approach which could complement the ongoing efforts of market liberalisation to overcome the structural weaknesses of the European Monetary Union: an inter-regional transfer mechanism would help correct cyclical imbalances in either direction (overheating and stagnation) to ease tensions building up in the EMU. A European corporate tax scheme or a form of European unemployment insurance system – each of which would complement their respective national counterparts – would have the desired effect without increasing contributions. These steps inevitably require an explicit commitment to economic and political integration by the member governments, but they may prove a very valuable add-on to the Lisbon process, which risks being slowed down by member governments' increasingly protectionist and hostile attitudes towards reforms and market liberalisation, especially if their country is locked in a prolonged downswing under the conditions of EMU.
... (CPSB, 2002, c.f. Vaaler et al. 2005. Economists and financial journalists produced competing forecasts of the odds of a default, which ranged from "no better than 50-50" ("Can Brazil be Saved?") to 70 percent (Williamson 2002). ...
... The decision to offer such a large package to Brazil has been interpreted by market observers as a major U-turn in official policy which had increasingly emphasised the moral-hazard cost of large bail-outs, and as representing a break with the tradition of supporting large aid programmes only for countries with US military bases or a common border (Hale, 2002). Just as the decision not to bail out Russia in 1998 had triggered a retrenchment of bank credit to emerging markets, it is therefore envisageable that the Brazil support might help restore bankers' sentiment in the longer term if (and the if is still big) Brazil's unpleasant debt dynamics (Williamson, 2002) can be improved by currency appreciation, restoration of growth and lower interest spreads. ...
Concerns about corporate governance standards have often centred on emerging markets, notably after the 1997-98 Asian crisis. A series of corporate scandals have now raised investor concerns over the quality of earnings and opaque balance sheet structures in the US and other developed countries. The paper assesses the impact of higher risk on developed-country corporate assets on the prospects for private capital flows and their composition to emerging-market economies. While investors have been paying a higher premium (in terms of higher price/earning ratios and lower interest rates) for US assets partly because of the perceived superiority in the quality of their earnings reporting, one could expect a shift away from asset classes with rising risk to assets where risks were already high — emerging-market debt and equity, for example. Higher flows to emerging markets, however, can be impeded by the negative repercussion of lower asset prices in the developed markets on the real ...
Les préoccupations suscitées par les modalités de gouvernance des entreprises se sont focalisées le plus souvent sur les marchés émergents, surtout après la crise asiatique de 1997-98. Mais aujourd’hui, après une série de scandales, les investisseurs s’interrogent sur la qualité des bénéfices d’exploitation des entreprises et sur l’opacité de leurs bilans comptables, aux États-Unis comme dans d’autres pays développés. Ce Document technique évalue l’impact qu’aurait une hausse du niveau de risque des actifs financiers des entreprises des pays développés sur les mouvements de capitaux privés à destination des économies émergentes, ainsi que sur leur composition. Jusque-là, les investisseurs ont accepté de payer une surcote sur les actifs américains ( via des ratios coût/bénéfice supérieurs et des taux d’intérêt inférieurs), notamment du fait de la plus grande qualité supposée des résultats d’exploitation. Désormais
... Spreads on Brazil's debt rose to above 2,000 basis points in March 2002. A crisis was averted, in part owing to an extraordinary arrangement under which all the candidates pledged to adhere to an IMF program were they elected (Williamson 2002). However, as the cost of borrowing rose throughout 2002, the size of Brazil's already large debt multiplied. ...
A number of high-debt emerging-market economies face structural, long-term debt problems that tend to keep their growth rates low, that impart an unequalizing bias to the growth process, that severely constrain social spending and human development, and that make them vulnerable to capital flow reversals. Unless the nature and pace of growth can be improved in these lower-middle income countries, the Millennium Development Goals (MDGs) are unlikely to be met either in many of these countries, or globally. These high-debt emerging-market economies face an impossible choice between draconian and never-ending fiscal austerity, or crisis and a “debt event.” Both “bitter pills" impose high social and economic costs. This paper proposes the creation of a “Stability and Social Investment Facility” (SSF) to be housed either at the IMF or the World Bank. It would be a long-term facility to help high-debt emerging market countries cope with and ultimately overcome what will otherwise remain a chronic structural weakness. The SSF would be an instrument providing a steady and predictable source of long-term funds as well as a strong policy signal to help high-debt emerging-market economies reduce their debt burden without having to forgo vital pro-poor social expenditures and growth programs. For the facility to have a significant impact on debt and income dynamics in the eligible countries, we estimate it would need to lend 20 million for every $1 billion of lending. The rationale for the subsidy element is its catalytic role in facilitating a strong commitment to both prudent macroeconomic policies and pro-poor growth policies. The lower interest cost of the SSF, even if modest, would make it financially and politically easier for governments in eligible countries to address their long-term social (MDG) objectives, while maintaining a sound fiscal stance.
... Another key reason why the distinction between confidence crises and crises of fundamentals is difficult to make is that the former often rapidly turn into the latter: if interest rates rise, debt can rapidly be subject to a snowball effect, which then becomes self-fulfilling with regard to the fundamentals themselves. This is the argument used by Williamson (2002) to characterize the Brazilian crisis: the debt is at a level made unsustainable by high interest rates but which would rapidly be brought down to an equilibrium level (recalling the government's primary surpluses) by low interest rates. Economics is familiar with such multiple equilibria: low rates represent one equilibrium, high rates another. ...
If interest rates (country spreads) rise, debt can rapidly be subject to a snowball effect, which then becomes self-fulfilling with regard to the fundamentals themselves. This is a market imperfection, because we cannot be confident that the unaided market will choose the ‘good equilibrium’ over the ‘bad equilibrium’. We see here a fundamental flaw in the process of market discipline. We propose a policy intervention to deal with this structural weakness in the mechanisms of international capital flows. This is based on a simple taxonomy that enables us to break down the origin of crises into three components: a crisis of confidence (spreads and currency crisis), a crisis of fundamentals (real growth rate), and a crisis of economic policy (primary deficit). Theory then suggests a set of circumstances in which a lender of first resort would be desirable. The policy would seek to short-circuit confidence crises, partly by using IMF support to improve ex ante incentives. Theory also illuminates the potential role of collective action clauses (CACs) in eliminating the risk of self-fulfilling debt crises.
RESUMO Enquanto nos aspectos éticos e sociais o governo Cardoso (1995-2002) foi bem-sucedido, seus resultados econômicos foram frustrantes. Nesses oito anos, a taxa de investimento não aumentou e a renda per capita diminuiu, enquanto as dívidas pública e estrangeira aumentaram substancialmente. Esse fraco desempenho econômico pode ser explicado por três causas encadeadas: um erro na definição da agenda, a adoção do Segundo Consenso de Washington e a alienação das elites. A decisão de definir a inflação alta como o principal problema a ser enfrentado, em vez de alcançar o equilíbrio em contas estrangeiras, representou um grande erro macroeconômico, o que pode ser explicado pelo Segundo Consenso de Washington. Esse consenso propôs na década de 1990 que os países altamente endividados deveriam crescer contando com a poupança externa, embora essa não seja a experiência entre os países da OCDE. O resultado foi avaliar o real, o aumento artificial dos salários e do consumo, de modo que, em vez de crescimento, aumentamos o endividamento. Por que essa estratégia foi adotada? Os interesses dos países ricos não são difíceis de adivinhar. Por parte do Brasil, a única explicação é a alienação das elites brasileiras em relação ao interesse nacional do país. Como resultado final, o governo Cardoso termina com outra crise na balança de pagamentos.
O estado da Flórida e seus produtores de laranja e de cana-de-açúcar colocam-se no centro do palco das relações econômicas entre os Estados Unidos e o Brasil e do drama da Área de Livre Comércio das Américas (ALCA). Poderosos e persistentes, esses modestos interesses econômicos têm sua importância política amplificada pelo papel de pivô da Flórida nas recentes eleições presidenciais dos Estados Unidos. Aumentado pelo papel de pivô do estado no Colégio Eleitoral, os interesses dos setores de laranja e de cana-de-açúcar têm efetivamente restringido a autonomia do Executivo dos EUA. Este trabalho emprega a teoria de ratificação de acordos internacionais de Putnam e examina as contribuições de campanha dessas indústrias para explorar os desafios de ratificação de Nível II associado à influência política das principais forças protecionistas da Flórida. Este exame demonstra como os interesses faccionais e as instituições políticas podem se cruzar para ampliar a importância de indústrias com interesses estreitos e prescritos territorialmente, sob condições de alta incerteza eleitoral. Por fim, o artigo explora as implicações desses interesses inegociáveis sobre as relações EUA-Brasil e a política comercial brasileira.
This paper focuses on the interactions between politics and finance in emerging economies stressing the case of Brazilian presidential elections. More precisely, it underlines how Wall Street (i.e. financial markets) incorporates and reacts to major Latin American political and democratic events such as presidential elections. As a case study, we focused on Brazilian presidential elections as a starting point, after having analysed, in a first approximation, the political regimes preferences of markets through the indexes. The second section presents an empirical study of Wall Street analysts' perceptions of a major political occurrence, the presidential elections in Brazil. The empirical analysis is based on the production output and reports of Wall Street investment firms during the years 2002 and 2003, focusing on the top fixed income teams of Wall Street, as ranked by Institutional Investors, Bloomberg and Latin Finance in their league tables. Finally, in the third and last section, we used economic and financial historical data of previous election years in Brazil, in order to view the specific events from a comparative historical perspective.
If interest rates (country spreads) rise, debt can rapidly be subject to a snowball effect, which becomes self-fulfilling with regard to the fundamentals themselves. This is a market imperfection, because we cannot be confident that the unaided market will choose the "good" over the "bad" equilibrium. We propose a policy intervention to deal with this structural weakness in the mechanisms of international capital flows. This is based on a simple taxonomy that breaks down the origin of crises into three components: confidence (spreads and currency crisis), fundamentals (real growth rate), and economic policy (primary deficit). Theory then suggests a set of circumstances in which a lender of first resort would be desirable. The policy would seek to short-circuit confidence crises, partly by using IMF support to improve ex ante incentives. Theory also illuminates the potential role of collective action clauses in reducing the risk of self-fulfilling debt crises.
This paper investigates the main sources of instability in Brazil during the currency and financial distress episode of 2002. We test for financial contagion from the Argentine crisis and the impact of factors including IMF intervention and political uncertainty in raising the probability of crisis. The empirical investigation employs a Markov-switching model with endogenous transition probabilities. Copyright © 2005 John Wiley & Sons, Ltd.
Those who have watched financial crises in emerging economies over the past two years would have noticed two things. First, there has been a high concentration of financial crises in Latin America. Second, debt problems have been at the heart of several recent crises, including the prominent ones in Argentina, Brazil, Turkey, and Uruguay. This paper discusses issues of debt sustainability in emerging economies. After providing in section II a brief account of the hard times that have recently fallen on Latin America, Goldstein presents in section III a few summary debt statistics for several recent crisis economies. Section IV draws attention to a group of pitfalls in the standard framework for assessing government debt sustainability in emerging economies. Section V examines the factors influencing near-term debt dynamics in Brazil. After outlining several positive features of the Brazilian economy that did not exist in Argentina on the eve of the latter's recent crisis, he lays out the arguments for expecting that economic growth in Brazil this year will be slow (only slightly above 1 percent), that the real interest rate on the public debt will be relatively high (about 10-1/2 percent), and that the government is unlikely to deliver a primary surplus in the budget much beyond 4 percent of GDP. Despite the good start made by the new Lula government, the author maintains that the debt situation remains precarious; he argues that the Brazilian authorities should aim for a primary surplus, particularly when the global economy is heading into a period with increased downside risk. He also explains why Brazil's central bank should be granted (de jure) operational independence as soon as possible and why maximum efforts should be made to negotiate trade arrangements that increase Brazil's low level of trade openness. If the recent market rally fizzles and interest rates, capital flows, and the exchange rate again take a significant adverse turn, serious consideration ought to be given to doing a major debt restructuring with the cooperation and support of the International Monetary Fund (IMF). Finally, in section VI, Goldstein draws some implications of these debt issues for the policies of the IMF and of its major shareholders (the G-7 countries). He concludes that IMF surveillance needs to pay much greater attention than it has in the past to the build-up of vulnerable domestic and external debt positions in emerging economies, that the Fund has to adopt a tougher position in making debt sustainability a key condition for IMF lending, and that there would be an important role for IMF financing in easing the adjustment costs of a necessary debt restructuring.
Brazil's public debt is large and interest payments weigh dangerously on the government's budget. In 2001 interest expenditure amounted to 7,3 per cent of GDP. On a mark-to-market basis (that is considering the effect of exchange rate depreciation on the value of foreign currency-denominated bonds) interest expenditure reached 9 per cent of GDP. These figures are large, though not unusual in high debt countries: they are comparable to those observed in some European countries (Italy, Greece and Belgium) prior to monetray union. Two factors contribute to this level of debt service: the size of the debt and the average cost of the debt.
No abstract is available for this paper.
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