Brazil, IMF Finalize a New Rescue Deal

Brazil cleared another hurdle Monday on the road to economic recovery, finalizing a deal with the International Monetary Fund for a sorely needed currency infusion in exchange for more cost-cutting.

The agreement, hammered out over six weeks of talks, revives a $41.5-billion rescue process that was interrupted in January when Brazil’s sudden currency devaluation made the previous commitments meaningless.

An initial $4.9 billion could be deposited in reserves by the IMF as early as April. An additional $4 billion could come from the United States and other lenders shortly afterward.

The sealing of the accord drew applause from Brasilia to Washington. The U.S. government, the biggest nation contributor to the package, said it welcomes the strengthened economic program.

The prospect of a new program for Latin America’s biggest economy brought some tranquillity to financial markets after two months of nail-biting.

The market also cheered first-time guidelines on how much Brazil can spend to protect its currency against speculators.

In the last week, Brazil’s currency, the real, has strengthened against the dollar on expectations of the IMF deal.

The Sao Paulo Stock Exchange’s Bovespa index closed 4.4% higher on Monday after the details of the accord were released.

Brazil’s economy still faces a gruesome outlook for 1999. Brazil and the IMF expect the economy to contract by 3.5% to 4% this year, and inflation is forecast to hit 16.8%--quite a shock for a country whose residents had got used to negligible price growth over the last two years.

“I think that some recession is inevitable, but without the accord, it would be worse,” said Jose Carlos de Faria, senior economist at ING Barings in Sao Paulo.

To get Brazil back on the road to growth, the government must first tackle its biggest problem, a budget deficit of 8% of gross domestic product.

It was a lack of faith in Brazil’s ability to bring its spending under control that sent investors running from the country in January, taking billions of dollars with them, for fear of an Asia- or Russia-style collapse.

Under terms of the fresh accord, Brazil will raise its basic budget surplus, excluding interest payments, to 3.1% of gross domestic product from the original 2.6%.

The larger surplus will counter the higher cost of Brazil’s debt after interest rates were raised to help stem inflation, inflation being the government’s main worry in the post-devaluation era.

But to meet these targets, the government still faces some formidable footwork.

“I think the figures all depend on the negotiations between the federal and state governments,” said Sergio Yshikawa, economist at M.A. Consultores in Sao Paulo.

President Fernando Henrique Cardoso is working feverishly to get states to cut down on their free-wheeling spending, especially for their bloated work forces.

The IMF and the wealthy nations that assembled the rescue package in November will be keeping a close eye on the success of Cardoso’s fiscal austerity push after seeing the first $9 billion they lent be spent in a vain attempt to defend the currency.

U.S. Treasury Secretary Robert E. Rubin issued a statement Monday urging “firm and sustained implementation” of the pact by Brazil to preserve stability and foster growth and investor confidence.

With a rescue deal for Brazil in place, experts expect a markedly more stable picture for both currency and interest rates after the turbulent first months of 1999.

The currency should settle at 1.70 per dollar at year-end from 2.00 per dollar now, and the annual benchmark interest rate will average 29% compared with the current 45%, according to the accord framework.

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* MEXICAN RALLY: Bolsa index reaches highest level since July. Investor Spotlight, C14