Re: Soros' recipe for Brazil

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

I think there is a measure of plausibility. As I understand him, Soros is
saying that the governments of developed economies should effectively
subsidize Brazilian debt. This is perhaps workable as a temporary fix. Not
surprisingly though, it helps to bail out Soros. Soros has a great habit of
proposing solutions to make the world safe for Soros' speculations. Notably,
he advocated a currency board in Russia after he took large hits there. When
Soros makes a policy recommendation, my first response is to grab my wallet.

The problem remains (IMO) in that we have inherited unworkable levels of
debt from the 1970's from astoundlingly bad lending policies (and borrowing)
policies in the 1990's. We have gone through several iterations of tinkering
around the edges with this debt. But what is needed is to write off
significant portions and reduce the overall level of world indebtedness.

I would posit this as a supplement to, not a replacement of, Paul Davidson's
recommendation of an ICU.

-----Original Message-----
From: Trond Andresen [mailto:trond.andresen@xxxxxxxxxxx]
Sent: Monday, August 19, 2002 8:10 AM
To: pkt@xxxxxxxxxxxxxxxx
Subject: Soros' recipe for Brazil


What do PKT'ers think about Soros' recipe for Brazil?
(see last paragraphs).

Trond Andresen


>Financial Times; Aug 13, 2002
>
>COMMENT & ANALYSIS: Don't blame Brazil
>
>By George Soros
>
>The International Monetary Fund's $30bn (ý20bn) rescue package for Brazil
>was larger than expected, and should have brought relief to the markets.
>But it did not. After an initial rally, bond interest rates have settled
>at levels incompatible with long-term solvency.
>
>The country's benchmark C bonds yield about 22 per cent in dollar terms.
>Brazil's debt equals 60 per cent of gross domestic product, of which 35
>per cent falls due within one year. A primary surplus of 3.75 per cent,
>required by the IMF programme, is not sufficient to prevent a significant
>further deterioration in the ratio of debt to GDP, especially as high
>interest rates are pushing Brazil into recession.
>
>The IMF would have liked to insist on a higher primary surplus but that
>would have been politically unacceptable. The difference was eventually
>papered over by a communiquý that put the burden of proof on Brazil. The
>size of the package was meant to compensate for the gaffe by Paul O'Neill,
>US Treasury secretary, about Swiss bank accounts; and to provide a vote of
>confidence in a star pupil.
>
>Its failure to bring the required relief indicates that there is something
>fundamentally wrong with the international financial system as currently
>constituted. Brazil's problems cannot be blamed on anything Brazil has
>done; the responsibility falls squarely on the international financial
>authorities.
>
>Admittedly, Brazil is going to elect a president who the financial markets
>do not like; but if international financial markets take precedence over
>the democratic process, there is something wrong with the system. Under
>the influence of market fundamentalism, the IMF does not provide enough
>benefit for its members.
>
>In recent years, the so-called Washington consensus has put its faith in
>the self-correcting nature of financial markets. That faith has been
>misplaced. Ever since capital was allowed to move around freely, one
>crisis has followed another and the IMF has been called on to put together
>ever-larger rescue packages.
>
>Market fundamentalists blame the moral hazard created by the IMF bailouts.
>In the aftermath of the Asian crisis, the IMF switched from bailouts to
>bail-ins. The true risks of investing in emerging markets were revealed,
>and there has been a reverse flow of capital from the periphery to the
>centre ever since.
>
>The fact is that financial markets require a lender of last resort to
>preserve stability, and there can be no lender of last resort without a
>modicum of moral hazard. Every developed country has learned this lesson
>domestically but we have yet to learn it internationally. The current
>system is lopsided. It is designed to preserve the international financial
>markets, not the stability of periphery countries. It has rendered the
>risk/reward ratio of investing in emerging markets unfavourable.
>
>The Washington consensus starts by asking how big a budget surplus is
>needed to keep indebtedness within bounds - the higher the interest rates,
>the bigger the required surplus. In the case of Brazil, with 20 per cent
>interest and 4 per cent growth, the primary surplus would have to be 4.8
>per cent to keep the debt/GDP ratio from rising - an obvious
>impossibility.
>
>The right question to ask is what interest rates could be reconciled with
>reasonable growth. A primary surplus of 3.75 per cent would be the maximum
>required, rather than the minimum, and could support real interest rates
>of no more than 10 per cent.
>
>The challenge would be how to bring interest rates down to that level.
>That might require some international credit enhancements or guarantees,
>and the task would be to find the right instruments to keep the real risks
>- as distinct from moral hazard - within tolerable bounds.
>
>Before the bailout, I suggested that instead of a traditional IMF package,
>the central banks of developed countries should open their discount
>windows for Brazilian government debt. Brazilian bonds would rally and
>confidence would return at the sight of a lender of last resort.
>
>The risk would be minimised by not raising the amount the central banks
>were willing to lend in line with the rise in market prices. Commercial
>banks would reinstate their credit lines and export-led growth could
>resume, especially if the US completely rescinded its steel tariffs. The
>crisis would dissolve into thin air.
>
>My proposal would do the trick that the recently announced package did
>not, and would cost no more. It is not too late to adopt it. Once it was
>in place, the incoming president would have no reason to contemplate any
>interference with the normal servicing of debt. As it is, he would be
>justified in demanding some international support, rather than allowing
>his country to bleed to death as Argentina did.
>
>Financial markets are right to factor in a significant risk of debt
>reorganisation or default, and once they do so it is liable to become a
>self- fulfilling prophecy. That is why the markets cannot be left to their
>own devices.