RIO DE JANEIRO, July 5 (UPI) -- The Brazilian government, facing increased worries of having its economy wrecked by a combination of political uncertainty and contagion from neighboring Argentina, has reportedly approached the International Monetary Fund about the possibilities of receiving a new aid package.
According to one business daily, the IMF has responded positively.
Valor Economico reported Friday that Brazil is seeking an undisclosed sum it could draw on if it were deemed necessary to help smooth the transition to a new government following October's presidential elections.
Currency and equity markets, along with the country's bond prices, have been hammered here in the past month as investors fret over the possibility that the socialist Lula da Silva will win the presidency.
Lula, leading polls by 16 percent, has put the fright into the markets with his past talk of halting debt payments and reversing privatization. In this, his fourth run at the presidency, he has backtracked on that talk, but nobody is willing to put their money on his newfound free-market thinking.
Brazil's existing agreement with the IMF -- a $15.5 billion credit line -- is set to expire in December. To date, Brazil has drawn some $14.5 billion of that amount, with $10 billion of that having been withdrawn two weeks ago, when officials set out to calm the foreign exchange and buy back some foreign debt. The steps the government has taken here --including aggressive intervention by the central bank to try and prop up the currency -- have been largely muted by the worry that Brazil will not be able to meet its debt requirements in the short and mid-term.
"The Brazilians' performance under the (IMF) program has been very strong, very resolute, bold, and I think we have continued to have a high degree of confidence in the authorities' ability to manage their situation," IMF spokesman Thomas Dawson told reporters in Washington earlier this week. When pressed if that confidence would remain should Lula take control, Dawson said he could not respond to such a hypothetical question.
Meanwhile, as the Brazilian markets hypothetically tank on these imaginary fears of Lula's presidency, officials in Brazil -- hypothetically speaking, of course -- are desperately seeking a way to calm markets and reassure investors that the country remains on the course of reform.
For nearly a decade, Brazil has been the IMF's star pupil of sorts in South America. The country underwent aggressive reform under 1994's Real Plan, created by local economists, and met international approval by floating its currency -- the Real -- in 1999. The Fund has routinely cited Brazil's sound economic fundamentals, as compared to the chaos in Argentina. It is quite likely the Fund will do every prudent thing in its power to aid Brazil, South America's largest economy, knowing full well that if it goes the way of Argentina, they will have a crisis on their hands comparable to that which rocked Asia in 1997, though Fund officials are playing down that possibility for now.
"Markets are certainly nervous ... but we do not see this as a contagion in the sense of which that phrase has been used in recent history," Dawson said in regard to Latin America. "We think that markets do in fact differentiate quite strongly among countries. I think the markets' judgments of what goes on in Brazil are fundamentally based on Brazilian policy and performance."
Which, in a perfect world, would be true. The economies on the continent are not all the same. Brazil's is far larger than all the others and is more diversified and industrialized -- as opposed to, for example, Argentina's reliance on exporting raw goods. But emerging economy investors the world over are looking at this political turbulence in Brazil and the chances of its economy faltering even more, and they are quitting the region as a whole, thus contributing to the self-realization of a default in Brazil and the eruption of a region-wide crisis. It is a nasty cycle.
But any new deal will certainly hinge on the Fund's confidence in the government, which will succeed that of President Fernando Henrique Cardoso, who at the end of his second term and eight years of governance is not allowed to run again. IMF officials, in working out the details, will certainly require that the leading presidential candidates get more specific about their economic plans for the country, which the sooner they do the calmer investors and markets will be. Priorities include sound monetary policy, keeping inflation in check, maintaining a primary budget surplus equal to 3.75 percent of the gross domestic product, progressing on central bank independence and -- above all -- continuing to honor its debt obligations.
Brazil's Central Bank President Arminio Fraga, who once worked for George Soros and is widely respected in international circles, was in Washington last month for talks with the IMF and is returning to the U.S. on Monday. He will be taking a positive message to the IMF, reasserting as he has for weeks that the country's problems are based solely on politics and not economic fundamentals, but he is sure to secure more funding. In a statement released Friday, Fraga encouraged current and future governments to make lowering the country's risk premium a priority.
"From the moment that this commitment gains credibility, a significant reduction in the risk premium of the country would be feasible, with benefits for the country that would be felt immediately," Fraga wrote.