Brazil and Argentina: Money, Military Menaces

With the suddenness of a tropical storm, the Brazilian debt crisis erupted last month, just as it appeared that the government was making progress with its economic recovery policies and approaching long-term solutions to its huge debt problem. Last week , the United States bluntly told Brazil that its latest proposals--in effect, for canceling one third of its total $113-billion debt--were unacceptable. Now, neither side seems to have an “acceptable” suggestion for the other.

Five years after Mexico jolted the world banking community with a sudden financial collapse, unable to meet its foreign payments, Brazil and Argentina face new debt crises that may prove even more dangerous to international fiscal stability. The political implications of the financial troubles for Latin America are equally menacing, with the very survival of democratic regimes possibly at stake.

The Economist, a British weekly, has already proclaimed that Brazil “remains the biggest threat to the stability of the world’s financial system,” and the consensus among international bankers and government officials in Western capitals is that special concessions to Brazil would not only fail to solve its debt problem, but would threaten to unravel debt settlement arrangements already in place for the Third World.

The view in Washington is that the “crunch” in relations with Brazil could come at the end of October if the decision to write off a part of the Brazilian debt can no longer be postponed by Western private banks holding most of the total. In the absence of other options, the potential losses for U.S. banks, on paper, is in tens of billions of dollars; the senior American negotiator remarked, “We’ve simply never faced a threat of such magnitude, and it’s unpredictable what happens in October.”

In the case of Argentina, the latest foreign financial crisis also came abruptly, weeks after agreements were signed to reschedule $34 billion of that nation’s external debt. All of a sudden, Argentina did not have enough cash to pay current obligations. President Raul Alfonsin last week decided on a freeze for payment of debt interest--about $4 billion a year on a total debt of $53 billion. A freeze on interest payments could mean that Argentina will now be declared ineligible to receive promised new loans and its economy may go into another tailspin.

Brazil and Argentina together account for nearly one half of the towering Latin American debt. Policies adopted by one inevitably affect the other because they occupy important places on the Third World financial chessboard where the destinies of many nations are played. Mexico, with a $101-billion debt (the second largest after Brazil), is temporarily in good shape with its creditors because increased oil revenues are rescuing the country, but bankers have now learned to take nothing for granted.

Central to the debt crises are domestic politics. In Brazil, the weak democratic government of President Jose Sarney opposes a basic debt-restructuring agreement with the International Monetary Fund because of powerful pressures from nationalist groups that regard fund-imposed austerity measures as a “foreign intervention.” Brazil preceded Argentina’s payment freeze; last February the Sarney government unilaterally suspended interest payments on $78 billion of the outstanding debt. Brazil refuses to enter into new agreements with the IMF until private banks first grant Brazil nearly $8 billion in fresh money to finance a resumption of the interest payments. The banks, in turn, refuse to negotiate with Brazil prior to an IMF agreement. On the chessboard, this is stalemate.

The Brazilians had tried to break the impasse with the proposal to obtain a 30% discount on their debt and 35 years to pay the balance. But U.S. Treasury Secretary James A. Baker III told Brazilian Finance Minister Luiz Carlos Bresser Pereira on Tuesday that the idea was a “non-starter.” Bresser agreed to fall back on “conventional” strategies although Brazil clearly has no fresh ideas and the immediate danger is that at the end of the third quarter on Sept. 30, the banks, to protect their shareholders, will refuse to roll over payments due on that day. The last day of the month could be the first major confrontation.

An impasse could be catastrophic for Sarney. Inflation in Brazil is currently running at a more than 200% annual rate and the economy is in terrifying condition following the failure of last year’s recovery programs; a new plan launched in April, despite initial promise, may also founder, especially if the debt crisis gets out of hand. Sarney, who became Brazil’s first civilian president in 1985, after 21 years of military dictatorships, could become extremely vulnerable to pressure from the armed forces if he does not perform an economic miracle; the generals and admirals are already vocally unhappy over the drafting of a new liberal constitution for Brazil.

In Argentina, the worsening economic situation--inflation now running at a 126% annual rate (after a 1986 rate of 80%) and inadequate export earnings--became compounded by the government’s defeat in last Sunday’s congressional and gubernatorial elections. Alfonsin, the embattled democratic leader, saw his Radical Civil Union party lose the majority in the congress because of gains by the Peronist Party, labor-oriented followers of the late Juan D. Peron.

The Peronists’ triumph was a blow to Alfonsin’s economic policies, notably Argentina’s arrangements with the IMF, and it may create strong pressures for changes directly affecting the external debt picture. The Peronists, for example, are against the IMF, urging both a suspension in debt payments and a debt reduction of the type attempted last week by Brazil. At the same time, the military--its members both anti-Alfonsin and anti-Peronist--may again try to destabilize Argentine democracy.

The next chapter in the newest debt dilemmas could also be played out in Washington at the end of this month, when finance ministers from all over gather for the annual meeting of the IMF and the World Bank. The debt questions could easily dominate the proceedings once again. The most disturbing lesson from the current Brazilian and Argentine emergencies is that the international financial community--governments, multilateral institutions and private banks--have not yet learned, five years after the Mexican experience, how to deal with Third World economics and how to monitor and project trends before the next catastrophe happens.