Brazil's Big Dreams Turn to Nightmares As Recession Looms

Times Staff Writer

Brazil is a robust nation of buoyant spirits and big dreams--but it has its glum moments. And one of those moments is now.

An urgent problem is money. Strapped for hard currency, Brazil halted interest payments last month on its huge debt to foreign banks. The moratorium jolted the international financial community and the Brazilian public. It was painfully clear that the biggest debtor nation in the Third World was in crisis.

But the foreign debt is only part of Brazil's economic problem. Since the beginning of the year, inflation has exploded, reaching double-digit monthly rates. Fears of recession are growing.

Consumers, businessmen, farmers and workers are perplexed and angry. In the midst of the storm, the lightning rod is President Jose Sarney, 56.

A civilian who took power after two decades of military government, Sarney completed two years in office Sunday. Instead of getting credit for leading the country on a proud march to democracy, he is being widely blamed for the overshadowing economic crisis.

Critics are accusing him of political opportunism, economic ignorance and gross mismanagement. A crowd booed him when he appeared in public recently.

Many economists say Brazil will have to tighten its belt and make difficult sacrifices to put its economic house in order. But government officials, including Sarney, warn that too much austerity could provoke a popular upheaval with unpredictable consequences for democratic development.

The predicament is common to several emerging democracies in Latin America, but its international effect looms larger in Brazil.

Brazil's population, estimated at 135 million, is more than twice that of any European democracy, and its economy is the eighth-largest in the Western world. Brazil owes nearly one-third of the combined foreign debt of all Latin American countries.

Loans from private banks account for about $70 billion of Brazil's $109-billion debt. The rest is owed to governments and international lending organizations.

Brazilian officials and foreign bank representatives are about to start negotiations over rescheduled payments and lower interest rates, and Sarney has said that the talks will determine how long interest payments remain suspended. His finance officials will also want additional billions of dollars in loans. Creditors, however, want guarantees that Brazil will straighten out its own finances. That means austerity and probably a recession, economic analysts say.

Some say a recession already is beginning. High interest rates and inflation, coupled with a lack of confidence in the government's economic management, is discouraging business investment.

Consumption is declining. Waldir Nunes, who owns a small clothing store in a Rio de Janeiro slum neighborhood called Jacarezinho, said that inflation has cut his sales sharply in the past two months.

"With the merchandise going up every day--that galloping inflation--sales fall," Nunes, 39, said.

Abilio de Medeiros, a friend of Nunes, said inflation is rapidly reducing living standards. "In my family, there has been a very big regression," Medeiros, a 32-year-old schoolteacher, said. "If this lasts long, there could be a social convulsion."

Waves of strikes, merchant protests and farmer demonstrations are sweeping the country. Striking merchant seamen stalled shipping last week, and the army occupied oil refineries to keep workers from shutting them down.

Gen. Octavio Medeiros, director of personnel for the army, was recently quoted in a major newspaper as saying that the government lacks a "firm hand" of authority. Asked for his opinion on the transition to democratic rule in Brazil, Medeiros replied: "I don't know if there is a transition."

No one, however, is predicting a coup by the armed forces.

"I think they (military leaders) realize there is no way the nation would accept a resumption of military rule," banker Pedro Leitao da Cunha said.

A foreign political analyst said the economic crisis further discourages any thoughts of an army takeover. "They certainly wouldn't like to have this hot potato now," the analyst said.

The military overthrew Brazil's last elected government in 1964 and held power until 1985. Recessions in 1981 and 1983 helped to drive out the generals.

A leading figure in the political party that backed the military government was Sarney, then a senator. When the generals decided to relinquish power to civilians, Sarney switched to the opposition Brazilian Democratic Movement and was named as a compromise candidate for vice president.

The Democratic Movement's presidential candidate was Tancredo Neves. He won the vote of an electoral college but was on his deathbed by inauguration time. Sarney took his place.

When he was sworn in as president on March 15, 1985, Sarney was not popular. A year later, his popularity skyrocketed, thanks to an economic program called the Cruzado Plan.

Changing the name of Brazil's inflated currency from cruzeiro to cruzado, Sarney froze prices and stopped inflation. He also froze pay, after increasing it 8% to 15%.

The measures increased consumer purchasing power and set off a nationwide buying binge. For several months, the economy boomed and everyone seemed happy. Just a few months ago, public opinion polls portrayed the president as a national idol.

But signs of economic sickness were already appearing. Producers, unhappy with frozen prices, failed to meet demand for many goods, and shortages developed. Retailers demanded under-the-table surcharges for many products.

Exports declined and Brazil's trade surplus dwindled. The country began dipping heavily into its foreign currency reserves to pay foreign debt interest.

Nevertheless, public faith in Sarney and his Cruzado Plan persisted. Sarney's party, the Democratic Movement, won a landslide victory in November elections for Congress and state governorships.

Then the bubble burst.

The government decreed a package of abrupt price increases, setting the stage for a new surge of inflation. Sarney's popularity collapsed, according to surveys.

Prices of other goods were also rising, and inflation in January--16.8%--set a monthly record for Brazil. When 1986 economic performance figures came out, Brazilians learned that the economy had expanded by 7.7% but exports had fallen by 13%. Growth was subsiding and foreign currency reserves fell to $4 billion from nearly twice that amount two years earlier.

Andre Lara Resende, a former central bank official who helped to design the Cruzado Plan, said in an interview that the economists' blueprint had not been followed. In the first place, Resende said, the wage increases decreed by Sarney at the beginning of the program were too high. They overstimulated consumer demand, overheating the economy.

Government economists had also emphasized that the price freeze would work only for a month or two. In April, 1985, Finance Minister Dilson Funaro told congressmen that price readjustments would have to start soon.

"He was called back by the president and told he shouldn't say that," Resende recalled.

Sarney also failed to effect reforms that economists said were needed to control inflation, such as curtailing deficit spending by the government and state enterprises.

According to Resende and other economists, while prices and wages were frozen, imbalances in the economy and inflationary pressures were mounting dangerously.

"The government, in a sense, was fooled by the idea that a miracle was being done," Resende said. He said the boom was artificial and that now an industrial recession is inevitable. The recession could be shortened if the government would impose a program of austerity and reforms, he added.

Funaro told the newspaper O Globo this month that he plans energetic fiscal reforms. "We have to put Brazil in order," the finance minister said. "Inflation has returned, and we need to combat it with strong measures. In the governmental area, we are going to impose deep austerity, with rigorous cuts in spending."

Resende is skeptical: "One thing is to say you're going to do it--another is to do it."

A recession would further damage Sarney's already battered defenses against political opponents who want to shorten his presidential term. Under the current constitution, enacted under the military government in 1967, the presidential term is six years. But Congress, acting in a dual role as a national Constituent Assembly, will soon begin writing a new constitution.

And some congressmen favor a clause that would mandate direct presidential elections well before Sarney's six years are up in 1991.

One of those who is said to oppose a six-year term for Sarney is Ulysses Guimaraes, president of the Brazilian Democratic Movement and also chairman of the Constituent Assembly. Guimaraes, 70, wants to be president himself, and his age leaves him little time to wait.

Few political analysts believe that Sarney can rely on Guimaraes and other leaders of the Democratic Movement to help him overcome the current crisis.

"He can't trust them," a foreign diplomat said. "None of them is interested in Sarney's success."

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