WASHINGTON/BRASILIA – The International Monetary Fund threw a $30 billion cash lifeline to Brazil on Wednesday, the fund's biggest bailout ever, seeking to shore up an economy that has been pummeled by investor angst ahead of presidential elections.
The package, which by far surpassed analysts' expectations, also allows Brazil to spend an additional $10 billion of its net foreign currency reserves to protect the local currency from a crisis of investor confidence over the October vote.
The 15-month deal effectively gives Brazil $40 billion of extra cash to help avert a financial meltdown, sparked by worries that the next administration will shatter macroeconomic stability and default on a $250 billion net public debt load.
The size of the deal was a sign that the United States, the IMF's largest shareholder, would avert at all costs a meltdown of Latin America's biggest economy, which would send shock waves across the hemisphere, to Europe and beyond, economists said.
Analysts also welcomed the drastic reduction in Brazil's net foreign currency reserves floor to $5 billion from $15 billion, vastly increasing the Central Bank's firepower to protect the beleaguered real currency
"By reducing vulnerabilities and uncertainties, a new IMF- supported program provides a bridge to the new administration starting in 2003," IMF Managing Director Horst Koehler said in a statement.
In return for the cash, the IMF requires Brazil to post a primary surplus target of at least 3.75 percent of economic output in 2003 -- a target to be revisited quarterly. The deal also demands that same level of primary budget surplus to be targeted in Brazil's budget guidelines law for 2004 and 2005.
The bulk of the loan, 80 percent or $24 billion, will be released in 2003, meaning their disposal will depend on the new president's commitment to the surplus target.
Koehler said the funds would underpin the economy, boost Brazil's growth potential, preserve low inflation and debt sustainability and improve employment and social conditions. The deal extends a $15 billion loan from the Washington-based lender signed last September. That accord expires in December.
OXYGEN FOR BRAZIL
President Fernando Henrique Cardoso defended the benefits of the loan, saying it gave Brazil ample breathing room. IMF critics say fiscal restraint policies can curb growth.
"Do not think that we will be strangled. We have oxygen," Cardoso said in a speech at his presidential palace. "The function of the IMF is positive and should be amplified."
Finance Minister Pedro Malan said the aid was "excellent for the country."
Economists said the large figure should impress expectant financial markets, although they cautioned that the positive reaction could be short lived. Many foreign investors are still squinting for signs that Jose Serra, the candidate of Cardoso and his administration, can gain in opinion polls.
"This is not an excuse to turn extremely bullish on Brazil," said Geoffrey Dennis, chief Latin American strategist at Salomon Smith Barney in New York. "It's an excuse to expect the market to rally some more and then turn defensive as you wait to see what the polls are going to do."
Serra, who investors see as the safest bet to continue Cardoso's free-market reforms and maintain stability, is trailing a dismal third in opinion polls.
Wall Street sees left-wing front-runner Luiz Inacio Lula da Silva and second-placed center-leftist Ciro Gomes as a step into the unknown and many investors are wary of betting on that kind of uncertainty, particularly after Argentina's collapse.
Economists said the deal rewarded Brazil for strictly maintaining IMF-penned fiscal restraint policies, unlike its crippled neighbor that is still trying to harness IMF cash.
The United States said it was "pleased with today's announcement."
"The United States stands ready to support Brazil as it continues to implement these policies," a statement said.
NO SLIPS ALLOWED
The IMF, though, took no chances. By inking a pact linked to quarterly budget surplus targets in 2003, it ties the new government to adhering to the terms of the pact or risk being cut off from the vital aid as soon as March if slippages occur in the budget.
The IMF sought to squarely assuage investor fears that candidates could shirk from committing to fiscal austerity, saying talks were underway now to secure support of opposition candidates for the current economic policies.
Front-runners Lula and Gomes have said they would maintain the current 3.75 percent surplus target in 2003 although they favor lowering it after that if economic conditions permit.
"We note that the Brazilian authorities are 'convinced that this agreement serves well the interest of the country, and are confident that it will be supported by the leading presidential candidates in Brazil.' Consultations are underway in this respect," Koehler said.
He added that the IMF will support, "any government committed to sound economic policies."
The latest deal takes IMF exposure to Brazil to about $45 billion, making it head and shoulders the largest ever IMF borrower. The IMF's previous biggest debtor is Turkey, which won $30 billion of IMF backing for its economic program.
The package marks a brutal fall from grace for a nation the IMF has long praised for its flawless economic performance. Just last year when Brazil secured its $15 billion IMF credit, expectations were that the cash would be purely precautionary. But a series of events conspired to force Brazil to burn through that cash, leaving it exposed and vulnerable again.
The Sept. 11 attacks on the United States slowed the global economy and the U.S. economy in particular, hurting Latin American economies that rely on exports to America. A plunge in equity markets, exacerbated by a raft of U.S. accounting scandals, made investors reassess their positions with many choosing to dump their emerging market investments.
Argentina's economic meltdown, brought on by a $130 billion debt default, a botched peso devaluation and a failure to reach an IMF deal after eight months of tortuous talks has also made matters worse for Brazil and others in the region.
The deal marks the second bailout this week in the region. On Sunday, Uruguay secured a $1.5 billion emergency loan to help it battle a run on its banks that started as a result of the domino effect from Argentina's woes.