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Markets React Positively to Largest Ever IMF Loan Given to Brazil - 2002-08-08

Top Brazilian finance officials are urging the country's leading Presidential candidates to endorse the terms of the International Monetary Fund's record $30 billion loan for Brazil. Financial markets are already reacting positively to the loan, unveiled late Wednesday.

Brazilian Central Bank chief Arminio Fraga describes the new IMF loan as "spectacular" for Brazil telling reporters Thursday the terms of the accord will not impose any additional restrictions on Brazil.

"It's a minimalist accord, a simple accord, which focuses on the issues that have been our objectives all along: fiscal responsibility, monetary responsibility, respect for contracts. It's an accord that does not present any restrictions to whatever policies a new president may adopt," Mr. Fraga said.

The $30 billion rescue loan, announced by the IMF late Wednesday, comes as Brazilians prepare to elect a new President in October. The campaign, which has two left-wing candidates in the lead, has unnerved financial markets causing the value of the Brazilian currency to plunge to record lows in recent weeks. The two candidates Luiz Inacio "Lula" da Silva and Ciro Gomes have attacked government policies aimed at cutting spending, reducing inflation, and expanding free trade.

At Thursday's news conference, Finance Minister Pedro Malan urged all the Presidential candidates to publicly endorse the new IMF accord.

"One of the objectives of this accord is that, first, to show that Brazil has enormous international support, and secondly that there is enormous interest internationally, and by this government, that Brazil have a smooth transition no matter who is elected in October. So it is obvious that what will facilitate this process is if the main candidates express themselves clearly, unequivocally, and with conviction that this accord is good for the country and that its terms will be respected," Mr. Malan said.

The terms of the 15-month agreement require the government to maintain a primary budget surplus of 3.75 percent of the gross domestic product, and to meet single digit inflation targets over the next year and a half. In return, Brazil will receive $6 billion from the IMF this year, and $24 billion next year subject to periodic reviews. The new loan is in addition to $15 billion that Brazil received from the IMF last year," he said.

The $30 billion loan is the largest ever by the IMF, and is aimed at halting financial turmoil in Latin America's biggest economy. With Argentina's economic crisis already affecting Uruguay, the record IMF loan appears to be an attempt to shore up Brazil and prevent the financial crisis from spreading throughout the region.

Brazilian economist Paulo Levy said the size of the loan should be enough to stop the speculation that has weakened Brazil's currency and bonds. But Mr. Levy, who works at the Institute for Applied Economic Research in Rio de Janeiro, warns continuing uncertainties still may affect the Brazilian economy

"Even though there has been a lot of improvement in terms of the policy stance of the main presidential candidates, there's still a lot of uncertainty about that," said Mr. Levy. "And this will not disappear until the elections, and until a new government states clearly what it's policies will be. The second thing has to do with the conditions in the international economy. We know that recent data released in the U.S. shows that the American economy is not performing as well as initially thought earlier in the year and that might produce a reversal of expectations, reduce the pace of economic growth and affect international trade, and that in spite of recent performance of Brazalian exports might yet produce another round of negative developments in terms of reducing exports," Mr. Levy went on to say.

Brazilian financial markets reacted positively Thursday to the IMF loan. The Brazilian currency gained ground against the dollar, while stocks traded higher in the Sao Paulo "Bovespa" market.