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IMF Loan to Brazil Linked to Spending Cuts - 2001-08-13

Brazil has received a new line of credit from the International Monetary Fund, which appears to be aimed at protecting the South American giant from economic problems that could spread from neighboring Argentina. But in return for the money, Brazil will have to make substantial spending cuts.

Brazilian officials say the government of President Fernando Henrique Cardoso will have to cut spending and increase its budget surplus over the next 18 months to qualify for the IMF credit line.

The spending cuts of about $2.5 billion will be in addition to the budget reductions already made under an austerity program implemented by President Cardoso more than two years ago when he devalued the Brazilian currency.

The IMF announced it will provide Brazil with a credit line of up to $15 billion aimed at what IMF officials described as a "supplementary reserve" should Brazil need it. The IMF move came on the same day it approved an accelerated payment of $1.2 billion to Argentina, which is is in the midst of an economic crisis.

Argentina's continuing recession and huge debt of $128 billion have generated deep uneasiness in international financial markets because of fears Argentina may default on its debt payments. This uncertainty has spread to Brazil, an important trading partner of Argentina, causing speculators to bring down the value of the Brazilian currency to record lows. In unveiling details of the new IMF agreement program Tuesday, Brazilian Finance Minister Pedro Malan and other top officials did not specifically mention the Argentine crisis as the reason for seeking the new credit line. Instead, they described the IMF accord as a precautionary measure, and took pains to emphasize Brazil is not in the midst of a financial crisis.

But at the same time, Finance Minister Malan also acknowledged Brazil is not completely immune from the economic problems affecting the rest of the world.

"The objective is to reduce the vulnerability of the country, and this is what we're doing," said the finance minister. "Those who think Brazil should be immune from world economic instability, should propose some ideas so that Brazil can be completely immune. Until recently, it was thought that North Korea was immune to these instabilities, along with the poorest nations of the world which have no integration with the international community. But I don't think these are the models of development we have in mind," said Mr. Malan.

In addition to its weakening currency, Brazil is undergoing a serious energy crisis that has forced the government to ration electricity use throughout the country. The energy crisis, along with high interest rates and the weakening currency, is expected to reduce Brazil's economic growth this year.

But at Tuesday's news conference, Mr. Malan expressed confidence over Brazil's future, and its ability to surmount its economic problems.

"We Brazilians over the past eight years have overcome the crisis of hyperinflation in 1994," he said. "We overcame the Mexican crisis at the end of early 1995; we overcame the Asian crisis of 1997 and the Russian crisis; we overcame the negative expectations produced by the devaluation of 1999. We are now overcoming our energy crisis, and we'll overcome the turbulence that is affecting us, as it is affecting the rest of the world," said finance Minister Malan.

The new IMF credit line has been welcomed by economists and investors, who say it will help protect Brazil from the economic turmoil in Argentina.

In an editorial Wednesday, the influential Folha de Sao Paulo newspaper said the accord creates a sense of relief in Brazil and provides the country with what it described as a kind of financial armor plating against the effects of the Argentine crisis.

But as the editorial and others point out, the IMF agreement forces more drastic spending cuts on the Cardoso government, as Brazil prepares for presidential elections next year. The cuts could become a potent political issue for the opposition, while undermining the chances of whoever emerges as the governing coalition's presidential candidate.