Brazil Must Take Hard Line on Debt or Peril Democracy

Brazilian President Jose Sarney’s dramatic announcement in late February that interest payments would be suspended on his country’s $108-billion foreign debt once again focused attention in the United States, as well as in the rest of the West, on the Latin American debt crisis.

Foreign critics have tended to blame Brazil’s economic woes on its government’s own recklessness. A wage-and-price freeze known as the Plano Cruzado, implemented by the Sarney government in early 1986 to curtail a continuing inflationary spiral, led instead to an orgy of consumption that depleted the cash reserves needed to make interest payments on the debt.

To deal with the problem, the country’s overseas creditors say, the government should implement the policies of its military predecessors: Cut back spending to lower the deficit, limit future wage increases and steer production back toward exports and away from internal markets. Both the World Bank and the International Monetary Fund, the favorite current scapegoats of many politicians in Brazil, are sending teams of financial experts to the country. They can be expected to weigh in with similar advice.

But the Brazilian public and its elected representatives in Congress have a very different idea of who is to blame for the crisis, and what the government’s next step should be. The Plano Cruzado, for all its imperfections, was enormously popular and caused a revolution of hope along with a redistribution of wealth never before seen in the country. Sarney says that the plan provided for almost a quarter of the population, 30 million desperately poor people, to enter the consumer market for the first time.

To most Brazilians the blame for the economic mess in which they are currently mired lies not with the present civilian government but with the military regimes that ruled the country between 1964 and 1985, as well as with the American banks that aggressively plied billions of dollars in high-cost loans to stoke often ill-advised development schemes or personal corruption. Many Brazilians have asked why they should be expected to repay loans to foreign banks that were knowingly made to a harsh dictatorship, which used the funds in part to repress the population.

When the banks’ agents arrived in Latin America after the first oil shock in the mid-1970s with endless supplies of petrodollars, the generals gorged themselves and applied the easily won funds to one foolhardy project after another. Perhaps the most notorious of these, in a country of virtually limitless hydroelectric potential, was the now-abandoned plan to build nuclear-power plants throughout Brazil.

Brazilian military officials assured a muzzled public and its gagged representatives that the country’s external debt was the best-managed in the world. Incredibly, the debt assumed by the military governments was contracted with variable interest rates. When the rates skyrocketed in the early years of this decade, Brazil was doomed.

The political environment is now quite different from the era of indiscriminate borrowing. The collapse of the dictatorship and the return to democracy could turn out to be a disaster for banks with debts to collect in Brazil. Never again, Sarney said recently, will recession be the answer to the problems posed by the debt. Brazil’s dominant political party, the center-left Brazilian Democratic Movement, or PMDB, pledges to deliver vital political support to Sarney only if he rejects--at any cost--the mounting pressure from abroad to slow the economy.

National elections last November left PMDB governors in 22 of Brazil’s 23 states. The party’s landslide victory gave them outright control of the federal House and Senate. A historic enemy of military rule throughout the dictatorship, the PMDB has persistently advocated a hard line in debt negotiations, and is firmly behind Sarney’s moratorium declaration.

Though ostensibly its leader, in reality Sarney is the PMDB’s political prisoner. The survival of his presidency depends on his ability to maintain the party’s support. When President-elect Tancredo Neves died in 1985 before he could take office, Sarney assumed not only the presidency but also the leadership of the party, which he had joined just months before. PMDB stalwarts always had been suspicious of Sarney. Before he decided to make his historic alliance with Neves, a key move in Brazil’s return to civilian rule, Sarney had been a leader of the New Liberal Alliance, a party that bolstered the dictatorship.

Sarney, a conservative democrat committed to civilian rule, has little choice but to accept the counsel of the powerful PMDB leaders who support an extension of the debt moratorium. He knows from Brazil’s troubled past that a vacuum in the presidency would be an invitation to intriguers and coup plotters. He reasons that a confrontation with foreign banks or the IMF is preferable to the collapse of democracy at home, which a cave-in to the creditors on the debt issue might very well bring about.