S. American Economies in War’s Line of Fire

This jewel of a city on the Atlantic is nearly 7,000 miles from Baghdad, but it might as well be next door as far as many of the country’s leading economists and politicians are concerned.

The Brazilian economy, South America’s largest, is edging ever closer to a precipice of out-of-control inflation, capital flight and recession. Bombs falling on Iraq might just be the push that sends Brazil over the edge.

“The announcement of war is already bringing disastrous consequences for our economy,” President Luiz Inacio Lula da Silva told Congress last month. “We face difficult times ahead. The stability of our currency is threatened.”

Across South America, people fear that a war against Iraq could drive this region’s most troubled economies into recession and heighten social tensions in countries whose leaders have only a tenuous grip on power.

At least three South American nations -- Bolivia, Paraguay and Venezuela -- have been racked by political and economic crises for months. Bolivia and Paraguay are struggling to implement austerity programs as part of bailout agreements with the International Monetary Fund. The budget cuts have provoked widespread protests.

When President Gonzalo Sanchez de Lozada of Bolivia announced last month the implementation of an income tax to deal with the nation’s budget deficit, police in several cities mutinied. At least 22 people were killed as the army suppressed the protest and the rioting that followed.

Having announced a few days earlier that the tax was necessary “to avoid a bankruptcy like Argentina’s,” Sanchez de Lozada withdrew the proposal.

Bolivia’s budget deficits would probably grow if a Persian Gulf war brought, as expected, a rise in oil prices, a decline in exports and greater caution among the international investors who have funded billion-dollar public debts in this hemisphere’s developing nations.

A recent IMF study found that each $5 increase in the price of a barrel of oil would lead to a 0.2% drop in growth in developed countries and a 0.4% drop in developing nations.

The U.S. ratings firm Standard & Poor’s said last month that a war in Iraq would probably hit developing countries that already have high levels of public debt -- including Brazil, Jamaica and Guatemala -- much harder than the healthier economies in Iraq’s neighborhood, such as Bahrain and Qatar.

Countries that rely heavily on external borrowing to finance debt “may be far from the conflict but could have their creditworthiness hurt more than those nations closer to the fray,” S&P; analyst John Chambers said.

Even before the threat of faraway war, investors were jittery about Brazil.

Lula, leader of the leftist Workers’ Party, inherited a $260-billion public debt upon taking office New Year’s Day. Since then, Brazil’s currency, the real, has lost 9% of its value, provoking an inflationary spiral that the government is fighting by raising interest rates and reducing the money supply.

Last month, Brazil’s central bank raised the prime lending rate 1 percentage point to 26.5%. At such a high rate, economists said, consumer credit becomes virtually nonexistent.

Aloizio Mercadante, the Workers’ Party leader in the Senate, described the interest rate increase as “a necessity brought about by the international situation.”

In the short term, Brazil’s fiscal and monetary crisis could force the new president to reduce spending on the anti-poverty and anti-hunger programs he promised during last year’s campaign.

“If the war fears continue, it will affect the rate of exchange,” said Luiz Suzigan, an economist here. “There will be a new round of inflation and a greater need for belt-tightening, which will have consequences on the president’s popularity.”

The issue of war does provide some political cover for Lula, who has come under fire from hard-liners in his party for adopting orthodox economic policies. And, as in other parts of the world, polls here show that the overwhelming majority of people oppose a U.S.-led strike on Iraq.

Rising oil prices and uncertainty about the future have contributed to currency devaluations even in some of the region’s strongest economies, such as Chile, where the value of the peso has fallen sharply, losing 5% relative to the dollar in recent weeks.

“If a war against Iraq hasn’t even started yet and we’re already feeling its effects, then what will happen to the world economy and Chile when a confrontation finally does take place?” columnist Felipe Larrain asked recently in the daily El Mercurio.

Tony Garza, the U.S. ambassador to Mexico, has said any war-related downturn in the U.S. economy would hit America’s neighbor hard. The United States is Mexico’s biggest trading partner, and the peso is unofficially pegged to the dollar.

“If you have some idea how a war will affect the American economy, compound it” for Mexico, he said.

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Tobar reported from Buenos Aires and Gobbi from Rio de Janeiro. Times staff writer Richard Boudreaux in Mexico City contributed to this report.