- The Washington Times - Thursday, June 27, 2002

Brazil today is going through some of the same financial gyrations that triggered the global economic malaise of 1999. The recent past has indicated that Brazil is not only the lynchpin of economic stability in Latin America, but a nation that can also potentially affect the world's economic superpower, the United States. For this reason, developments in Brazil should be gauged warily.

In a Jan. 22, 1999, speech, just days after Brazil's currency devaluation, Federal Reserve Chairman Alan Greenspan warned that Brazil's economic ills could dampen demand for U.S. goods, especially if its symptoms spread to other countries. Brazil, Mr. Greenspan said, must rein in its budget deficit and ward off inflation in order "to limit the potential for contagion to the financial markets and economies of Brazil's important trading partners, including the United States." Mr. Greenspan's successive interest-rate cuts in the wake of Russia's 1998 and Brazil's 1999 economic meltdowns helped insulate America from the risks of a global economic downturn.

In the past couple of months, Brazil has come under intense financial pressure that harkens back to its 1999 crisis. Investor wariness of Brazilian risk has caused debt to become incredibly expensive, which could in turn cause substantial financial havoc. Currently, Brazilian bonds are being sold at 17 percentage points over U.S. Treasury bonds.

But just what are the inherent risks to investing in Brazil? In many respects, the economic news is better than it was in 1999. The country's total external debt, which is equivalent to 50 percent of its gross domestic product (GDP), is held primarily by the private sector. Brazil's currency today floats freely, so investors aren't likely to be hit with an unexpected, precipitous currency plunge. And, since Brazil is widely considered by many in Washington to be too large to let fail, the International Monetary Fund loaned Brazil a not-too-shabby $15.7 billion last September.

Still, there are some economic clouds as well. Brazil's GDP declined by 1.5 percent last year. In the 12-month period that concluded March 31, the economy has grown a mere 0.5 percent. Meanwhile, public debt has grown to 55 percent of GDP, and much of it is linked to the dollar.

But investors' most strident fears are centered around the political future, rather than the economic present. Luiz Inacio Lula da Silva, the presidential candidate for the opposition Workers' Party, is so far the country's favorite to win the election in October. He is largely considered a wild card when it comes to economic policy. Mr. Silva has recently tried to allay investor jitters by pledging to "maintain whatever primary budget surplus was necessary" to control the rise of domestic debt, and said he wouldn't let Brazil default on its debts if he became president.

Much could happen in the months leading up to October, and Brazilians may just decide to opt out of the Lula da Silva gamble. Still, should the crisis in Brazil worsen, America should take the necessary monetary and fiscal steps to insulate the domestic economy from risk and stand prepared to help Brazil with advice. However, it should show considerable restraint in undertaking yet another billion-dollar Brazilian bailout.


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