Brazil to Receive $41 Billion in Aid to Stave Off Crisis

The International Monetary Fund and the world’s wealthiest nations Friday unveiled an aid package of more than $41 billion for Brazil in a long-awaited bid to prevent financial turmoil from whipping through Latin America.

The plan, which includes a $5-billion contribution from the United States, represents a departure for the IMF because it is “front-loaded,” making most of the money available within months of the program’s debut rather than doling it out over a period of years.

Although it comes at a time when financial markets are in a lull from the fevered gyrations of a few months ago, Brazil has topped the list of potential new victims of the crisis, and its vulnerability fuels ongoing concerns that financial meltdowns could spread through the Americas.

Brazil now emerges as a graphically visible test case in the Western Hemisphere of whether political leaders have the know-how to combat the financial whirlwind that started in Thailand in 1997, spread through Asia and leaped to Eastern Europe.

“Today’s agreement between the International Monetary Fund and Brazil is an important step in our effort to deal effectively with the global financial crisis and protect American prosperity and jobs,” President Clinton said Friday.

The package, he said, puts Brazil “in a position to confront the financial turmoil that threatens growth not only in emerging markets, but in economies around the world.”

In a favorable early indicator, investors Friday were betting that Brazilian interest rates will fall. That suggested that sky-high rates might not be necessary to prevent a hemorrhage of capital, perhaps leaving room to ease rates further to stimulate much-needed economic growth.

Under the plan, which was announced simultaneously in Washington and Brasilia, the IMF will provide $18 billion to help the highly indebted South American economy assuage the concerns of its lenders over its currency. Major industrial nations will provide an additional $14.5 billion on their own, including $7.5 billion from Europe and the $5-billion U.S. share. The World Bank and the Inter-American Development Bank each agreed to lend $4.5 billion.

The continued availability of the cash depends on Brazil’s ability to stick to its recently announced fiscal reforms, including changes in its social security system and slashing of its $64-billion budget deficit. Earlier this year, investors expressed their lack of confidence in Brazil’s financial policymakers by shifting tens of billions of dollars worth of its currency into dollars, although the outflow has recently stopped.

IMF officials said Friday that Brazil had pledged to maintain disciplined financial policies. “Time and again, Brazilians have said, ‘We are not going to make commitments on which we cannot deliver,’ ” said Stanley Fischer, the IMF’s first deputy managing director.

In a briefing for reporters Friday, Fischer described the cash infusion as “a very large, sufficiently front-loaded package” designed to “give confidence” to jittery investors. The money should be more than sufficient for Brazil to defend its currency, he said, adding: “You want to provide reassurance to the markets that you’re not slicing it very thin.”

Overall, Brazilian authorities could tap up to $37 billion within the first year of the plan, although IMF officials Friday were uncertain how much actually will be needed. Because of the various aid programs involved, Brazil will pay different interest rates for the credit, with a higher premium on certain short-term loans.

The rate for the U.S. loan payments will be about 9%, or 4 percentage points above the Treasury’s borrowing rates.

Observers have been expecting a deal for weeks. But officials said Friday that as a sense of calm seemed to descend on world financial markets, they felt less pressure to scramble to conclusion and chose instead to work methodically.

The 182-member IMF, which serves as a global lender for financially beleaguered nations, has been severely criticized for making matters worse in some of the nations it has tried to help this year and last. In August, it suffered a huge embarrassment when Russia devalued the ruble and defaulted on debt payments, prompting the global lender to suspend its $11.2-billion aid package for that country.

In Brazil, where the news media have continually been predicting an IMF deal, the stock market closed up just slightly, and financial analysts noted few surprises--except that the plan was less than the $45-billion amount that had been bandied about. Even on the television news, the story had to compete with reports about a possible U.S. attack on Iraq and Clinton’s settlement of the Paula Corbin Jones case.

At the same time, the ongoing threat of financial crisis has been a huge issue across all of Latin America. Interest rates in excess of 40% have hammered Brazil’s economy, and the austerity measures demanded in return for the IMF bailout--$23 billion in tax hikes and budget cuts next year alone--are expected to produce a punishing recession.

In one fragile sign of hope, the interest rate for one type of investment declined Friday in the wake of the IMF announcement. The rate on one-day certificate of deposit futures for January delivery, the most actively traded contract on the Sao Paulo BM&F; futures exchange, fell about one-tenth of a percentage point.

“This [deal] is extremely positive for Brazil because it reflects the importance Brazil plays in the Latin American region and it shows the credibility that Brazil has in the international community,” said Joel Korn, director of WKI Strategic Consulting Co. in Rio de Janeiro and president of the American-Brazilian Chamber of Commerce.

Also, financial authorities in Brazil have pointed to a rising inflow of capital, which totaled $130 million on Friday alone, a dramatic reversal from the panicky flight in August and September.

The new Brazil aid package does not formally embrace an approach recently pushed by the United States, through the Group of 7 richest nations, for the establishment of credit lines designed to help deserving nations stave off speculative financial attacks on their currencies.

It does, however, go much further than the IMF has previously gone in allowing “precautionary” funding that is available at the beginning of a loan, and which a struggling nation can use to calm worried creditors.

In one distinction from the U.S. Treasury’s past bailout for Mexico, the Brazil arrangement demands no collateral to guarantee the credit. But Treasury officials said a big difference between the loan recipients was that Mexico was running out of cash during the peso crisis of 1995, while Brazil still has $40 billion in reserves.

Maintained U.S. Treasury Secretary Robert E. Rubin: “While there are no certainties, we believe that this is the right program both for the people of Brazil and the economic well-being of the American people.”

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Paula Gobbi of The Times’ Rio de Janeiro Bureau contributed to this report.