Brazil’s IMF-sponsored Economic Disaster (cont.)


Jan Slakov

Enticing Speculators

The IMF sponsored operation was largely instrumental in enticing
speculators to persist in their deadly raids; "The money was there" to be
drawn upon. If the Central Bank of Brazil were to contemplate defaulting
on their foreign exchange contracts, the availability of IMF-G7 money
"upfront" financing would enable banks, hedge funds and institutional
investors to swiftly collect their multi-billion dollar loot. The IMF
programme signed in November thereby contributed to reducing the risks and
"reassuring speculators" that the Central Bank would uphold the Real.

Moreover, if central bank reserves were to bottom out, the authorities
would have immediate access to the first tranche (9 billion dollars) of
the IMF rescue package to meet their forex contracts. In the words of IMF
Deputy Managing Director Stanley Fischer:

"Because you want to provide reassurance to the markets that you're not
sort of slicing it very, very thin. You want the markets to know there is
a sufficient amount [of foreign exchange reserves in the Central Bank of
Brazil] available comfortably".16

Declining Central Bank Reserves

>From 75 billion dollars in July 1998, central bank reserves dwindled to 27
billion in January 1999. The first tranche of the IMF loan of more than 9
billion dollars had already been squandered to prop up Brazil's ailing
currency; the money was barely sufficient to "finance the flight of
capital" in the course of a single month.

"As it is the $41.5 billion of foreign currency that the IMF marshalled to
back Brazil's currency, was doomed to end up with the speculators, leaving
Brazil with its foreign currency debt increased by that amount. So often
has this scenario been played out (...) of other currencies kept at
artificial heights with interest rates, that by now the ploy should be
known to schoolboys. The government whose currency is attacked draws on
foreign loans arranged by the IMF, and turns over the foreign currency to
buy back its own paper. The "assisted" country ends up with the foreign
debt to the amount of the "aid" while the speculators pocket the proceeds
of the loans, and move on to the next replay of the scam."17

Hidden Agenda

In the above scenario, the approximate "timing" of the devaluation was
part of the IMF ploy; by ensuring a stable exchange rate over a 60 days
period (13 November 1998-13 January) it had allowed speculators to swiftly
cash in on an additional 20 billion dollars...

In this regard, the IMF had insisted that Brasilia maintain the stability
of the exchange rate as part of the agreement signed in November. Capital
flight had been speeded up after the November 1998 agreement; both Wall
Street and the Washington institutions knew that a devaluation was
imminent and that the IMF-G7 sponsored preventive package was nothing more
than a "stop gap measure".

In other words, the IMF programme under the "preventive" fund  enabled
currency speculators "to buy time". The Central Bank was "to hold in" as
long as possible. The hidden agenda was to trigger financial collapse;
Wall Street knew it was coming... The economic team at the Ministry of
Finance was said "to be taken by surprise" but they knew all along that
the devaluation was coming... In January, the IMF agreed to let the
currency slide. By that time it was too late, Central Bank forex reserves
had already been ransacked...

Collapse of the Real

In the wake of the January crisis, the IMF had wisely recommended a 20
billion dollar "floor" for Central Bank Reserves. (Reserves were at 75
billion dollars six months earlier). The setting of a "floor" --decided by
the IMF rather than by the Central Bank-- played a key role in fostering
capital flight in the immediate wake of the devaluation: the pillage of
forex reserves was to continue unabated until the "floor" was hit. Also in
January, the IMF had promised to release a second 9 billion dollar
tranche, with the added advantage to speculators of comfortably
"uplifting" forex reserves significantly above the 20 billion dollar

"A Marshall Plan for Creditors and Speculators"

In other words, this fresh gush of IMF-G7 bailout money was meant to
replenish Central Bank reserves ("on borrowed money") with a view to
encouraging a renewed wave of capital flight. The IMF Managing Director
Michel Camdessus (who certainly knew what was coming) had already
confirmed in November 1998 that "if the Brazilian authorities have a need
for [additional financial] resources ... [they] could have access to that
second tranche much earlier, as early as about the turn of the year." 18.
Ironically, that was precisely the time at which the Real-dollar peg broke

The IMF's presumption was (both prior and in the wake of the devaluation)
that the Central bank should continue to sell its forex reserves... And
with more IMF-G7 (borrowed) money coming into the coffers of the central
Bank, in all likelihood capital flight will continue in the months ahead
despite the 20 percent January devaluation of the Real... Very lucrative:
in the week following the financial meltdown of January 13th, capital
outflows were already running at 200 to 300 million dollars a day.19  And
Finance Minister Pedro Malan had agreed at his Wall Street breakfast
meeting with George Soros and William Rhodes (January 20th) that no
controls or impediments on the movement of money would be introduced...

Towards an Inflationary Spiral

A deadly economic process had been unleashed: the devaluation had
triggered an inflationary spiral which had contributed --alongside the
application of massive austerity measures-- to brutally impoverishing all
sectors of the Brazilian population including the middle class.

Historically in Brazil under a flexible exchange regime, wages had been
adjusted on a monthly basis in accordance with increases in the cost of
living. The plight of Brazil today, however, differs markedly from the
inflationary environment prevailing in the period prior to the 1994 Real

In the present situation, the IMF agreement signed in November explicitly
required the deindexation of wages as "a means of combating inflation". In
the IMF book, increased wages are viewed "as the main cause of inflation".
Similarly, the authorities have justified the increased levels of
unemployment ("a necessary evil") on the grounds that increased
unemployment is an effective means of dampening inflationary pressures.

In other words, after having unleashed a fatal inflationary spiral through
currency devaluation, the IMF was demanding the adoption of a so-called
"anti-inflationary programme". The latter, rather than addressing the
causes of inflation, constituted a coherent framework for rapidly laying
off workers and compressing wages (through deindexation).

Moreover, under the IMF agreement, monetary policy in the hands of Wall
Street creditors, who have the ability to freeze State budgets, paralyse
the payments process including transfers to the State governments and
thwart (as in the former Soviet Union) the regular disbursement of wages
to public sector employees including several million teachers and health

"Programmed Bankruptcy"

"The programmed bankruptcy" of domestic producers has been instrumented
through the credit squeeze (ie. extremely high interest rates), not to
mention the threat by Finance Minister Pedro Malan to allow for trade
liberalisation and (import) commodity dumping with a view to "freezing
price increases" and obliging domestic enterprises "to be more
competitive".20  Combined with interest rates above 50 percent, the
consequence of this policy for many domestic producers is tantamount to
bankruptcy, -- ie. pushing domestic prices below costs...

In turn, the dramatic compression of domestic demand (ie. resulting from
increased unemployment and declining real wages) has led to a situation of
oversupply and rising stocks of unsold merchandise...

This ruthless demise of local industry --engineered by macro- economic
reform-- has also created an "enabling environment" which empowers foreign
capital to take over the internal market, reinforce its stranglehold over
domestic banking and enable it to pick up the most profitable productive
assets at bargain prices...

In other words, the financial crisis (evolving from the inception of the
Real Plan in 1994) has created conditions which favour the  rapid
recolonisation of the Brazilian economy. The depreciation of the Real will
speed up the privatisation programme as well as depress the book value (in
Reales) of State assets. The IMF's "up- front fiscal adjustment"
--combined with mounting debt and continued capital flight-- spells
economic disaster, fragmentation of the federal fiscal structure and
social dislocation.

Implications for Latin America

The Brazilian financial meltdown has far-reaching implications for Latin
America as a whole where heavily indebted countries have been crippled by
macro-economic reform for more than fifteen years.

In this regard, the financial crisis creates an environment which
strengthens throughout the region, the stranglehold of Wall Street
creditors over monetary policy under the stewardship of the IMF.

In Argentina, the demise of the central bank is already firmly in place
under the "currency board" arrangement. The latter is essentially a
colonial-type banking system. Since the Brazilian financial crisis,
discussions are underway in Buenos Aires towards the replacement of the
Argentinian peso by the US dollar, implying not only the complete control
over money creation by external creditors but also the printing of
banknotes by the US Federal Reserve (which is controlled by a handful of
private US banking institututions).

Following the Argentinian model, other countries may wish to follow suit,
viewing the replacement of their national currencies by the US dollar as a
way of avoiding a financial crisis.

However, in all likelihood the "dollarisation" process (under the
Washington Consensus) will be instrumented through speculative attacks
which significantly depress the value of national currencies against the
dollar (ie. in anticipation of negotations concerning the replacement of
those national currencies by the US dollar).

Disarming the Neoliberal Agenda

"Economic crimes against humanity"?... Those responsible in Brasilia,
Washington and New York should not be allowed to walk away as if did not
know... The monetary authorities of G7 nations and fourteen other
countries co-financed the IMF sponsored scam (through the Bank of
International Settlements). The governments were fully aware of the
implications of the IMF loan agreement. They bear a heavy burden of
responsibility in endorsing a multi- billion dollar scam conducive to the
brutal impoverishment of the Brazilian people.

While the international community stands reluctant to disband the
Washington consensus and disarm financial markets, there are indications
that similar speculative assaults are to be launched in other countries
in Latin America, Asia and the Middle East with devastating economic and
social consequences.


1. A 90 days moratorium was declared. See  Financial Times, London,
January 18, 1999, p. 4.

2. Ibid.

3. Official figures, see Estado de Sao Paulo, 21 January 1999.

4. Wall Street Journal, New York, 6 January 1999.

5. IMF News Brief No 99/3, Washington, 18 January 1999).

6. World Bank News Release, Washington, 18 January 1999.

7. See Larry Rohter, Crisis Whipsaws Brazilian Workers, New York Times,
January 16th, 1998.

8. Estado De Sao Paulo, 21 January 1999.

9. See Michel Chossudovsky, The Globalisation of Poverty, Impacts of IMF
and World Bank Reforms, Third World Network, Penang and Zed Books, London,
1997, p. 182.

10. Estado De Sao Paulo, 21 January 1999.

11. Ibid

12. For further details see Michel Chossudovsky, the G7 "Solution" to the
Global Financial Crisis : A Marshall Plan for Creditors and Speculators,
Ottawa, 1998.

13. Wall Street Journal, 6 January 1999.

14. IMF Press by Michel Camdessus and Stanley Fischer, Washington,
November 13, 1998. See also "Letter of Intent" and "Brazil: Memorandum of
Economic Policies", IMF, Washington, 13 November 1998.

15. IMF Press Conference, op cit

16. Ibid

17. Wall Street Journal, op cit.

18. IMF Press Conference, op cit.

19. Estado de Sao Paulo, 21 January 1999.

20. The underlying "model" is that of the Ukraine where under IMF advice
(1994) US grain surplus were dumped on the domestic market with a view to
stabilising domestic prices but with the ultimate effect of destroying
domestic producers.

    Michel Chossudovsky

    Department of Economics,
    University of Ottawa,
    Ottawa, K1N6N5

    Voice box: 1-613-562-5800, ext. 1415
    Fax: 1-514-425-6224
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