- The Washington Times - Friday, August 9, 2002

The record $30 billion loan package for Brazil announced Wednesday by the International Monetary Fund helped stoke a major rally in the stock market yesterday, with the Dow Jones Industrial Average soaring 256 points to 8,722.

Big banks such as Citigroup Inc. and J.P. Morgan, which are among Brazil's largest creditors, led the stock advance as investors were relieved that Brazil won't default soon and add to the banks' already heavy loads of bad loans extended to Enron, WorldCom, Argentina and other struggling debtors.

"The banks are not going to have to face the prospect of Brazil falling apart in the next few months," said Brett Gallagher, head of equities at Bank Julius Baer. "It buys the country, and by extension the banks, some time."

Brazil's $264 billion of foreign debt includes $9.3 billion of loans from Citigroup and an additional $23 billion from J.P. Morgan and other U.S. banks, according to the CreditSights research firm.

The large exposure of banks and other major U.S. businesses whose solvency is critical to the health of the U.S. economy was an important factor in the White House's decision to overrule the policy against big bailouts espoused by Treasury Secretary Paul H. O'Neill, top officials said.

"Some countries are, it turns out, too big to fail," said an official close to the administration, who asked to speak on the condition of anonymity.

Mr. O'Neill last month made headlines blaming the recent swoon in Brazil's financial markets on fears of a leftist takeover in presidential elections this fall. His suggestion that any aid might be secreted away by investors into Swiss bank accounts prompted outrage in Brazil and a public apology by the White House.

Until this week, Mr. O'Neill consistently advocated a "hands-off" policy toward Latin America, a stance that led to an economic collapse and massive debt default in Argentina at the turn of the year as the United States and the IMF backed away from making any further loans until the country starts controlling its spending and debts.

The unprecedented size of the IMF loans to Brazil, which come on top of $15 billion in outstanding IMF loans and are conditioned on strict spending restraints, was a surprise to many Latin analysts. They also had expected the IMF and Treasury to wait until after Brazil's election to decide whether to provide further financial aid.

Only $6 billion of the loans will be available before the election, with the rest contingent on the winner honoring the loan agreement. A pledge yesterday by the leading candidate, populist Luiz Inacio Lula da Silva, to abide by the IMF's terms helped lift the U.S. and Brazilian markets.

The first hint of a major change in U.S. policy came Sunday, when the Treasury took the rare step of providing a direct, $1.5 billion bridge loan to Uruguay to stave off a banking crisis. Mr. O'Neill also signaled a more conciliatory stance even toward Argentina in a tour of Latin American capitals this week.

The administration's reversal has sparked praise from Clinton administration officials, whom Mr. O'Neill had criticized for providing huge bailouts to Asian countries during the 1998 financial crisis.

But the White House, which took the politically adroit step of announcing the loans after Congress left town for recess, faces strong criticism from conservatives, a Bush constituency that strongly supported its earlier laissez-faire approach.

"It's a 180-degree turn that shows that the era of big bailouts is not over," said Ian Vasquez of the libertarian Cato Institute. "It opens the door to the increasing possibility of a bailout of Argentina and shows the triumph of political pressure over sound policies."

Other analysts noted, however, that Latin American anger and resentment toward the United States has been building in the months since Argentina collapsed, with many on the continent blaming the United States and its free-market policies for the fall of millions of people into poverty.

Some analysts attribute Brazil's turn away from free-market reforms toward more left-leaning politicians to the growing anti-American sentiment.

The revival of aid to South America helps to avert that anger and patch up relations that also have been damaged by Bush moves this year to protect U.S. farmers and steel workers from Latin imports, analysts said.

It also may help pave the way for another Bush administration priority a Free Trade Area of the Americas pact. Mr. Bush designated that as a top goal when he took office, but it fell behind after the September 11 terrorist attacks and war in Afghanistan diverted his attention.

"The U.S. appears to have woken up to the realities in South America," said Riordan Roett, director of Western Hemisphere studies at Johns Hopkins University.

"There is considerable concern about the possibility for Latin America to go down the wrong path," said Douglas Smith, a former Treasury economist.

He warned, however, that the administration may have opened "a Pandora's box" by giving debt-strapped countries an excuse now to come forward and demand the same treatment as Brazil.

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