Brazil Eases Credit in Emergency Moves to Head Off Recession

The Brazilian government is taking emergency measures aimed at heading off a business recession. The measures include official controls on commercial interest rates and concessionary government credits for small and medium-sized businesses.

The steps, announced Wednesday evening by Finance Minister Dilson Funaro, are the government’s latest effort to deal with an economic crisis that has raised widespread fears of recession.

The crisis made international waves in February, when Brazil announced the suspension of interest payments on billions of dollars in foreign debt. President Jose Sarney said then that the country was running short of hard currency to service its $110-billion foreign debt without recessionary austerity measures. He vowed that the country would not sacrifice economic growth to pay the debt.

Funaro said in his announcement that the government’s goal is to “protect the productive sector from high rates of inflation” that have pushed up interest rates and discouraged production, investment and wholesale purchasing.

One new measure will limit the spread between the interest rates that banks pay depositors and what they charge on loans. That spread will be 4 percentage points a year for big banks and 5 points for smaller banks, limitations that Funaro estimated will cut bank spreads by half.

Banks that do not comply will lose their lines of credit with the government’s central bank, he said.

For small and medium-sized businesses, the central bank will make $330 million available for 36-month loans of up to about $20,000 each, Funaro announced. Interest during the first six months will be 7% a month.

In recent weeks, banks have been charging commercial interest rates of more than 20% a month. Monthly inflation so far this year has averaged 15%.

Joao Cardoso de Mello, an adviser to Funaro, said the new anti-recessionary measures must be followed by an attack on inflation.

“Now we need to discuss with the society how to reduce inflation. That is the order of the day,” De Mello said.

The government tightly controlled prices between February and November 1986, stimulating a surge in consumer buying. As a result, the Brazilian economy grew by 8.2% in 1986 and monthly inflation was held to less than 2% for eight months. “Monetary correction”--the indexing of loans, rents and other values to keep pace with inflation--was suspended.

But the price controls caused economic distortions, including a rapid decline in the country’s trade balance, forcing the government to drop price controls. Inflation returned, and with it, high interest rates and monetary correction.

Meanwhile, the government began reducing growth in the money supply and taking other measures to dampen the overheated economy. The combination of monetary contraction and inflation slowed production and sales in many sectors. Protesting business and farmer organizations have repeatedly demanded government action to ease the crisis.

For farmers, Funaro announced that the government will underwrite concessionary repayment terms for loans obtained for agricultural production between May, 1986, and March, 1987.

He also announced credits for strapped state governments, which have been laying off thousands of workers during the last month.