Brazilian Crisis Calls International Financial Rescue Efforts Into Question

Perhaps the only way to solve the latest crisis besetting global financial markets is for Brazil to appropriate the glamour of a highflying Internet stock--by changing its name to “Brazil.com.”

That was the joke making the rounds on Wall Street on Thursday in the wake of Brazil’s decision to devalue its currency, and it underscores an uncomfortable point: that Brazil desperately needs a magic solution to its problems, and the International Monetary Fund and the Clinton administration appear unable to provide one.

Not even a $41.5-billion international loan package, marshaled two months ago by the IMF and the administration, has kept Brazil from suffering the sort of market panic that has befallen the likes of Thailand, South Korea and Russia over the last 18 months.

And in the aftermath of Brazil’s market-shaking admission Wednesday that it could no longer rigidly defend its currency, doubts are intensifying anew about whether the international community has the institutions, the know-how and the clout to protect the global economy from such shocks.

“Look at the handiwork of the IMF this past six months,” said David Rothkopf, president of Newmarket Co., a firm that advises companies on international developments. “In August, Russia was a top priority, and it’s in the process of serial default. In the fall, Brazil was a top priority, and it’s in the process of serial disappointment of world expectations.”

The IMF’s fiercest critics argue that the Brazilian debacle shows how traditional IMF austerity policies--such as high interest rates and deep budget cuts--are doomed to fail at saving troubled economies.

The IMF’s defenders reply that, on the contrary, both the Brazilian and Russian cases show how governments lose the confidence of markets by failing to implement IMF-mandated reforms.

In Brazil’s case, after all, the trickle of investors cashing in their reals for dollars became a flood precisely at times when the government of President Fernando Henrique Cardoso appeared to be losing its battle to force tough fiscal measures through Congress.

And, in contrast with Brazil, countries that have largely followed IMF prescriptions--notably Thailand and South Korea--appear to be recovering.

Indeed, the latest episode may show more clearly than ever the limits of the IMF’s power over the policies of borrowing countries. According to insiders, Brazil’s effective devaluation was decided without consulting the IMF or the U.S. Treasury, which issued frosty statements indicating their concern that the measure might not work to revive investor confidence.

“They notified us late Tuesday of what they were going to do, and we’re going to see how it works out,” one U.S. official said.

No matter which side is right--the IMF or its critics--the events of the past few days are hardly what was envisioned in November when the IMF and the Treasury Department proclaimed that Brazil would receive aid under a new, “precautionary” strategy advanced by President Clinton.

The idea was to correct a major problem in the approach to the crisis, which was that countries typically didn’t receive IMF loans until they were already engulfed in serious trouble. Now vulnerable countries could get help before it is too late, with loans disbursed upfront instead of being dribbled out over time.

The hope was that investors--seeing the formidable resources at the government’s disposal--would refrain from pulling their money out. Brazil swiftly drew more than $9 billion of the loans.

But even supporters of the IMF acknowledge that by attempting to correct one problem, the new approach may have created others--which in Brazil’s case may have translated into a reduction in politicians’ willingness to embrace fiscal reforms.