The Brazilian devaluation: National responses and international consequences

International Affairs

Volumn 75, Issue 4, 1999, Pages 729-741

  Bulmer Thomas, Victor ^a  

^a NONE

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EID: 0040368116     PISSN: 00205850     EISSN: None     Source Type: Journal    
DOI: 10.1111/1468-2346.00105     Document Type: Article

References (19)

1. This was the situation before the devaluation. Since January 1999, in dollar terms, the Brazilian economy has been substantially reduced and its share of regional GDP is now much smaller.
2. This article was completed in June 1999. It has not been possible to take subsequent events into account before publication.
3. For a critique of the Plano Real, see A. Delfim Netto, 'Opções de política econômica', Economia Aplicada, 3, 1999 (special issue).
4. For a critique of the Plano Real, see A. Delfim Netto, 'Opções de política econômica', Economia Aplicada, 3, 1999 (special issue).
5. The deficit in the current account of the balance of payments was even larger since Brazil is a net importer of services and, in addition, is required to pay interest on the foreign debt. In 1998, for example, the trade deficit was $6.5 billion, while the current account deficit (including interest and service payments) was $35.2 billion. This was equivalent to 4.8 per cent of GDP (see Table 1).
6. The Mexican devaluation at the end of 1994 unleashed the tequila crisis, which provoked a deep recession in Argentina in 1995. This led to negative inflation in Argentina for the first time this century. Since the Argentine peso is fixed by law at parity to the US dollar, this allowed Argentina to recover some of the competitiveness it had lost after the introduction of the new currency in March 1991.
7. The nominal deficit of the consolidated public sector, i.e. including all layers of government, reached 6.7 per cent in 1997 (see Table 1). This should be compared with the limit of 3 per cent set by the Maastricht Treaty for European countries in the euro zone.
8. It was a bold move for two reasons. First, Arminio Fraga had previously worked for a hedge fund controlled by George Soros, which left him open to all the criticisms that had been levelled against hedge funds after the Russian financial crisis in August 1998. Secondly, Brazil had had no recent experience of freely floating exchange rates and could not be certain of the impact on inflation.
9. In January 1999 government sources estimated the external liabilities of the private sector at $95 billion, with hedged assets (indexed securities and foreign exchange derivative positions) at $71 billion. See Ministry of Finance, Brazil's macroeconomic stability program 1999-2001 (Brasilia, March 1999), p. 11.
10. MERCOSUL (or MERCOSUR in its Spanish acronym) is the regional integration scheme formed in 1991 by Argentina, Brazil, Paraguay and Uruguay. Bolivia and Chile have had associate membership since 1996.
11. In November 1998 the estimated dollar liabilities of the financial system were $103.2 billion, while its dollar assets were $109.6 billion. See Ministry of Finance, Brazil's macroeconomic stability program 1999-2001, p. 11.
12. On the increase in the internal debt before the devaluation, see L. Gonzaga Belluzzo, 'Plano Real: do sucesso ao impasse', and P. Nogueira Batista Jr, 'O Brasil depois do Plano Real', both in Economia Aplicada, 3, 1999, special issue.
13. On the increase in the internal debt before the devaluation, see L. Gonzaga Belluzzo, 'Plano Real: do sucesso ao impasse', and P. Nogueira Batista Jr, 'O Brasil depois do Plano Real', both in Economia Aplicada, 3, 1999, special issue.
14. See P. Parente, Brazil's macroeamomic outlook (Brasilia: Ministerio de Orçamento e Gestão, March 1999). pp.18-19.
15. For a detailed analysis of the IMF agreement and in particular the assumptions about internal debt, see J. Welch, Brazil: life under a floating exchange rate (New York, London: Paribas, April 1999). The author argues that privatization receipts are the key to a reduction in the ratio of debt to GDP over the next few years.
16. At present, the social security system is technically bankrupt and is losing the government R11 billion per year. See UNIBANCO, Focus on Brazil (London: UNIBANCO, May 1999), p. 3.
17. There is also some support for the European Central Bank (ECB) model, but the track record of the ECB is still too short to command a consensus in its favour.
18. On seigniorage, and other arguments against dollarization, see V. Bulmer-Thomas, 'Against dollarisation in Latin America', Risk magazine (New York and London), July 1999.
19. Lending to the private sector does not - or should not - raise the same problems. Lenders are familiar with the risks of default on corporate bonds and the contagion is usually strictly limited.