SUNS #4293 Friday 2 October 1998


FINANCE: BRAZILIANS EXPECTED HIGHER US RATE CUT

Rio de Janeiro, Sep 30 (IPS/Mario Osava) -- The expectations spawned by the U.S. Federal Reserve Board's reduction of interest rates far outweigh the real contribution the measure will make
towards dulling the effect of the global financial crisis on Brazil.

The prospect of lower U.S. interest rates had been pushing stock markets prices up since last week, but Tuesday's announcement of a reduction of just one-quarter of a percentage point - from 5.5 to 5.25 percent - cut short the optimism.

Stock markets fell after the announcement of the cut, in line with the usual pattern: expectations cause prices to rise, but they fall again after such measures are implemented. Hopes for a sharper
decrease was another sign of the irrationality of the shares market, which is well acquainted with the Fed's wariness and conservatism.

The Sao Paulo stock market, however, rallied slightly at the end of the day Tuesday, closing with a 0.6% rise.

However, Brazil's main problem continues to be how to keep its money at home: capital flight, which has been averaging $500 million a day, rose to more than $700 million on Monday.

Exchange traders do not expect the Fed's decision to have an impact on the situation in Brazil, whose problem they say is one of a lack of confidence, not a problem of interest rates, which the Central Bank raised from 19 to 49.75 on Sep. 11, a move that failed to stem the outward flow of its foreign reserves.

All this has highlighted the fact that the decisive measures for Brazil - seen increasingly as the key piece in the global domino game, one that could either check or fuel the fall of the global system - are its own fiscal adjustment measures and international financial aid.

The fate of Brazil's economy, and therefore that of Latin America as a whole, continues to be hinged on the outcome of next Sunday's presidential elections and on negotiations in Washington at the International Monetary Fund and World Bank.

The re-election of President Fernando Henrique Cardoso in the first round - for which an absolute majority of votes is needed, and which has been predicted by opinion polls - would eliminate one
obstacle, but the crisis will be worsened if the candidates are forced to go to a second round of voting.

Even if he were re-elected, Cardoso and his economic team would still have to present a credible fiscal adjustment programme, one strict enough to regain the confidence of the global financial
market.

A primary surplus of at least 17 billion dollars a year would be needed, more than double the target announced three weeks ago, according to economist Raul Velloso, a specialist in public
accounts.

Velloso said the Brazilian state must offer credible guarantees that its revenue will surpass its expenditure by a sum equivalent to 2.3 percent of Gross Domestic Product (GDP) in order to pull the economy out of the trap in which it is caught.

That is a condition not only for obtaining the foreign loans needed to ensure the country's solvency, but also to check the vicious circle of high interest rates, economic recession and a ballooning
fiscal deficit.

The government has shown signs that it is ready to admit the need for a greater fiscal effort. The target announced for 1999, of a primary surplus equivalent to one percent of GDP, is "the minimum"
needed, said Secretary of Political Economy Amaury Bier.

International financial aid, which Velloso also considers indispensable to overcome the crisis, looks increasingly possible.

A growing movement of government officials and politicians, multilateral bodies and private sector leaders is pressing for a solution to Brazil's troubles.

Everyone stands to lose if Brazil becomes insolvent. This is why 50 large U.S. industrial groups published Monday in the 'Wall Street Journal' a call to the U.S. Congress and administration to take
actions to ensure that Brazil has a level of liquidity enabling it to withstand the fallout of the Asian crisis.

Today U.S. banks have around $7 billion invested in Brazil. A collapse here would drag down the rest of Latin America, the region where U.S. exports are growing the fastest.

And via Latin America, the contagion would reach the world's superpower.