Brazil’s IMF-sponsored Economic Disaster (Part 1)


Jan Slakov

Dear RN list,    jan. 30

This article (in two parts) is long, but it is damning and enlightening (at
least for financial illiterates like me).

Michel Chossudovsky, who gave us the term "financial warfare", ends this
article with a warning, a warning that should act as a "call to arms". While
most of us "financial illiterates" have not seen through the SCAM* of the
IMF "bail-outs" the guys who made the deals knew full well what they were
doing. It is not, really, an exaggeration to call this financial depredation
war crimes, crimes which leave families in despair and forests and oceans
plundered beyond hope of rescue.

How we might fight these crimes is not obvious;  in the Paul Cienfuegos
posting about how corporations make consumers of us all that Richard posted
yesterday to the cj list, we are urged to reclaim our right to democracy
everywhere, including in malls, for instance. This reminds me of Brazil's
MST (Landless Movement) and their motto: "Organize, Occupy, Produce". And
some of Brazil's clergy have spoken out for the right of the hungry to take
(or steal) food if they are unable to pay. Is there some way we can take
back what has been stolen from so many people? Whatever we do, those of us
who do have money to invest and pension funds, we must make the effort to
see that this money is not floating around on the global casino.

all the best, Jan
*I was curious to see who was calling the IMF system a "scam". None other
than the _Wall Street Journal_ as it turns out! We cannot claim ignorance
any more!

Date: Thu, 28 Jan 1999 14:18:31 +0100 (CET)
From: Andreas Rockstein <•••@••.•••>
To: Andreas Rockstein <•••@••.•••>

Dear Friends,

I am forwarding you a cleaned version!


---------- Forwarded message ----------
Date: Thu, 28 Jan 1999 10:52:17 -0300
From: ecoropa <•••@••.•••>

Date: Wed, 27 Jan 1999 13:38:05 -0500
From: Michel  Chossudovsky <•••@••.•••>



        Michel Chossudovsky

Professor of Economics, University of Ottawa, author of The Globalisation
of Poverty, Impacts of IMF and World Bank Reforms, Third World Network,
Penang and Zed Books, London, 1997. (The book can be ordered from

Copyright by Michel Chossudovsky Ottawa, January 1999. All rights
reserved. To publish or reproduce in printed form, contact the author at

This article follows an earlier article by the author (written before the
crisis) entitled "the Brazilian Financial Scam", Third World Resurgence,
November 1998;

The earlier article on Brazil is available at:

The Speculative Onslaught: From East Asia and Russia to Latin America

As Wall Street speculators extend their deadly raids, the global financial
crisis has reached a new climax. Succumbing to the speculative onslaught,
the Sao Paulo stock exchange crumbled on Black Wednesday, 13 January 1998.
The vaults of Brazil's central bank were burst wide open; the Real's
"crawling" peg to the dollar was broken. Central Bank Governor Gustavo
Franco was replaced by Professor Francisco Lopes who was immediately
rushed off to Washington together with Finance Minister Pedro Malan for
high level "consultations" with the IMF and the US Treasury.

Public opinion had been carefully misled; the "Asian flu" was said to be
spreading... The global media had casually laid the blame on Minas Gerais'
"rogue governor" Itamar Franco (a former President of Brazil) for
declaring a moratorium on debt payments to the federal government.1 The
threat of impending debt default by the State governments was said to have
affected Brasilia's "economic credibility".

Brazil's National Congress was also blamed for asking deceptive questions
and for not having granted in December a swift and  "unconditional
rubber-stamp" to the IMF's lethal economic medicine. The latter required
budget cuts of the order of 28 billion dollars (including massive lay-offs
of civil servants, the dismantling of social programmes, the sale of state
assets, the freeze of transfer payments to the State governments and the
channelling of State revenues towards debt servicing).

Shuttle Diplomacy

On the weekend of January 16-17th, Finance Minister Malan and Central Bank
Governor Lopes were in Washington for high level talks, on Saturday at IMF
Headquarters and on Sunday at the offices of the US Treasury. "Some
officials in Washington were [at first] outraged by the lack of
consultation by Brasilia over the original decision made late on Tuesday
[the 12th] to abandon the Real peg given the time and effort put into the
original [IMF sponsored] programme [negotiated in November 1998]".2

IMF Managing Director Michel Camdessus later admitted that "the decision
was a wise move to stop the loss of reserves" while emphasising that he
expected Brasilia to meet the fiscal targets under the Fund's financial
package signed in November. The flexible exchange rate regime was also
approved on condition the "extremely high" domestic interest rates
remained in force and that no foreign exchange controls be introduced
(which might prevent institutional investors from moving their money in
and out of the country).

Squeezing Credit

In insisting on tight monetary policy, the Washington based institutions
were also intent on destroying Brazil's industrial base, taking over the
internal market and speeding up the privatisation programme. The
government overnight benchmark interest rate was increased to a staggering
32.5 % (per annum) implying commercial bank lending rates between 48.7 %
and 84.3 % per annum.3 Local manufacturing crippled by unsurmountable
debts had been driven into bankruptcy. Purchasing power had crumbled;
interests rates on consumer loans were as high as 150% to 250% leading to
massive loan default...4

Endorsement by the Washington Consensus

Barely a few days after Black Wednesday, in a prepared press statement,
IMF Managing Director Michel Camdessus welcomed "...the reaffirmation of
fiscal consolidation as the foremost priority (...) together with the
structural and privatisation measures which are part of the agreed program
with the Fund".5 World Bank President James Wolfensohn and Vice President
Joseph Stiglitz -- known for his recent critique of the IMF's high
interest rate policy in East Asia--  also provided their firm backing: "We
are pleased with Minister Malan's final account of his Washington
meetings, and welcome his invitation to intensify our dialogue."6

Increase in the Price of Bread

On Monday morning January 18th, the Sao Paulo stock exchange had
temporarily recovered, regaining some of its losses. While "confidence"
had been reinstated, the Real had lost more than 20 percent of its value
in less than week. By late January it had declined by more than 40
percent, leading to an almost immediate surge in the prices of fuel, food
and consumer essentials. The price of bread increased immediately by ten
percent. The demise of the nation's currency had contributed to
compressing the standard of living in a country of 160 million people
where more than 50 percent of the population are below the poverty line.

In turn, the devaluation had backlashed on Sao Paulo's Southern industrial
belt where the (official) rate of unemployment had reached 17 percent in
1998. In the days following Black Wednesday January 13th, multinational
companies including Ford, General Motors and Volkswagen confirmed work
stoppages and the implementation of massive lay-offs of workers.7

Getting the Green Light from Wall Street

After his busy weekend schedule in Washington, Finance Minister Malan
hurried to New York for an early morning encounter (Wednesday the 20th of
January) at the Federal Reserve Bank: on "the breakfast list": Quantum
Hedge Fund George Soros, Citigroup Vice-President William Rhodes, Jon
Corzine from Goldman Sachs and David Komansky of Merrill Lynch.8

This private meeting held behind closed doors with Brazil's "creditors of
last resort" was crucial: Rhodes had headed the New York Banking Committee
on behalf of some 750 creditor institutions; he had first dealt with
Fernando Henrique Cardoso (when he was Finance Minister) to negotiate the
restructuring of Brazil's external debt under the Brady Plan.9 The latter
coincided with the launching of the 1994 Real Plan on behalf of creditors
and speculators. The pegged exchange combined (with the structure of high
interest rates under the Real Plan) served to boost the internal debt from
60 billion in 1994 to more than 350 billion in 1998...

Although the results of the breakfast meeting were not made public, Bill
MacDenough of the Federal Reserve Bank (who had carefully organised the
event), confirmed that Brazil's external and internal debts were
considered to be within manageable limits: "it is not necessary [at this
stage] to reschedule Brazil's external debt".10 Caving in to his Wall
Street masters, Finance Minister Malan fully acquiesced: there will be "no
renegotiation" nor debt forgiveness for Brazil...11

Background of the IMF Agreement

At first sight, the plight of Brazil appears as a standard "re-run" of the
1997 Asian currency crisis. The IMF's lethal "economic medicine" is
broadly similar to that imposed in 1997-98 on Korea, Thailand and
Indonesia. Yet there was a striking difference in the "timing" (ie.
chronology) of the IMF ploy: in Asia, the IMF "bailouts" were negotiated
on an ad hoc basis "after" rather than "before" the crisis. In other
words, the IMF would only "come to the rescue" in the wake of the
speculative onslaught, once national currencies had tumbled and countries
were left with unsurmountable debts.

In contrast, in Brazil the IMF financial operation was negotiated "before"
as part of a new standing IMF-G7 arrangement. The "economic medicine" was
meant to be "preventive" rather than "curative". Officially it was
intended as a means to "prevent the occurrence" of a financial disaster.
Moreover, the money under the preventive scheme was made available
"upfront" "before" (rather than in the wake of a currency devaluation).

Preventive Economic Medicine

This "preventive scheme" announced by President Clinton was launched in
late October. the leaders of Group of Seven nations had agreed "to help
economically healthy nations" stave off the dangers of currency
speculation. A multi-billion dollar "precautionary fund" had been set up.
Its stated objective was to prevent the "Asian flu" from spreading to
other regions of the World...12.

Brazil was first in line under the IMF-G7 scheme: part of the money had
already been earmarked to support President Fernando Henrique Cardoso's
"efforts at stabilising" the Brazilian economy. Barely two weeks later on
November 13th, the government of Brazil submitted its "Letter of Intent"
addressed to the IMF Managing Director Michel Camdessus. Attached to the
letter was the "Memorandum of Economic Policies" carefully drafted in the
usual economic jargon in conformity with IMF guidelines.

Detailed negotiations on a multi-billion dollar package (equivalent in
real terms to "half a Marshall Plan") had been carried out. Already in
July 1998, Washington had instructed Brasilia not to tamper with the rules
governing the multi-billion dollar futures and options trade on the Sao
Paulo exchange: "temporary exchange controls would have defused the
situation, but that is a no-no in the IMF's books, because it would
undercut the lucrative games of international finance..." 13

Lucrative?... The sheer magnitude of the money appropriated is
mind-boggling: during a 6-7 month period (July 1998-January 1999) 50
billion dollars of foreign currency reserves (largely transacted through
BOVESPA options and futures contracts) had been appropriated by private
financial institutions. Equivalent to 6 percent of Brazil's GDP, the money
confiscated through capital flight was to be "lent back" to Brazil in the
context of the 41.5 billion dollar operation...

"Up Front Fiscal Adjustment"

In constant liaison with Brazil's Wall Street creditors, the main
Washington actors of this multi-billion dollar ploy were First Deputy
Managing Director Stanley Fischer at the IMF and Deputy Secretary Lawrence
Summers at the US Treasury. The World Bank, the Interamerican Development
Bank (IDB) and the Bank for International Settlements (BIS) were also
involved in putting the financial package together.

Imposed by Brazil's creditors, the IMF programme was to include:

"a large up-front fiscal adjustment of over 3 percent of GDP with reforms
of social security, public administration, public expenditure management,
tax policy and revenue sharing that confront head-on the structural
weaknesses that lie at the root of the public sector's financial

Finishing touches to the multi-billion scam were completed at IMF
Headquarters in Washington in the night of November 12th; the agreement
was formally announced by the IMF Managing Director Michel Camdessus the
following morning in a press conference:

"I believe that the soundness of Brazil's program and the authorities'
commitment to it together with the strong support demonstrated by the
official international community provide the conditions for Brazil's
private creditors now to act to help ensure its success". 15

And who were these private creditors "helping to ensure its success"? The
same Wall Street financiers (and their affiliated hedge funds) involved in
the speculative onslaught against the Brazilian Real...

The IMF Agreement Contributes to Fuelling Capital flight

The 41.5 billion dollar financial package was intended to "restore
confidence". However, rather than staving off the speculative onslaught,
the IMF sponsored rescue operation contributed to accelerating the outflow
of money wealth. Twenty billion dollars were taken out of the country in
the two months following the approval of the IMF precautionary package: an
amount of money of the same order of magnitude as the massive "up-front"
budget cuts required by the IMF.

Marred by capital flight, Brazil's money wealth was being plundered: in
the months preceding the January financial meltdown, the outflow of
foreign exchange reserves was running unabated at a rate of 400 to 500
million dollars a day... Capital flight during the first two weeks of
January was of the order of 5.4 billion dollars (according to official