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Giant Aid Package for Brazil Close to Completion

Economy: Rescue plan, worth up to $45 billion, aims to boost currency and investor confidence.

November 09, 1998|From Reuters

The International Monetary Fund and the world's richest nations Sunday put final touches on a multibillion-dollar rescue package for crisis-hit Brazil in hopes of averting an Asia-style financial meltdown in Latin America.

Monetary sources said negotiators for the IMF and the Brazilian government, meeting in Washington, made progress in weekend talks on a letter of intent, laying out the country's policy commitments. Final agreement on the document--expected today or Tuesday--would clear the way for more than $22 billion in loans from the IMF, the World Bank and the Inter-American Development Bank.

Parallel negotiations were underway in Switzerland with the Bank for International Settlements (BIS), which is coordinating billions of dollars in bilateral assistance from the Group of 7 major industrial nations and other states to shore up Latin America's biggest economy.

Estimates of the size of Brazil's rescue package run from $30 billion to as much as $45 billion. IMF Managing Director Michel Camdessus said the loan program, which should be ready early this week, would have "all the potential to avoid a major crisis in this country and put it potentially on a sustainable track of recovery."

The Brazil package would be one of the largest ever arranged by the IMF. Last year, in response to Asia's financial crisis, the Washington-based lending agency put together a $58-billion package for South Korea, a $42-billion-plus deal for Indonesia and a $17-billion loan arrangement for Thailand. In July, the IMF arranged a $23-billion package for Russia.

Brazil needs international support to stave off a devaluation of its currency, the real, and to reassure panic-stricken investors. A collapse of the real could cause financial havoc in the rest of Latin America.

Negotiations with the IMF reached a final stage after the Brazilian government announced an austerity plan to save $84 billion over three years. Brazilian officials hope the austerity drive will help restore confidence and that the government will not need to draw on much of the international aid.

"We need a volume of funds that would dissipate any sort of doubt that is currently put against Brazil, although we may not need to use the money," Pedro Parente, an official with Brazil's Finance Ministry, said in a newspaper interview.

IMF and Brazilian officials had hoped to wrap up negotiations last week, but international monetary sources said they needed the weekend to complete the letter of intent and to coordinate bilateral support.

In exchange for commitments on economic reform, the IMF was expected to offer $15 billion to Brazil, incorporating a special credit line proposed by Group of Seven nations. The precautionary credit line could be tapped at times of acute financial stress, ensuring the government pays its bills and has enough cash to defend its currency.

The World Bank was preparing a series of loans worth $4.5 billion, while the Inter-American Development Bank stood ready with $3.4 billion. The loans would be issued at higher interest rates than existing World Bank and IADB credits. Money would be disbursed more quickly but under shorter repayment terms.

As part of the loan package, the Group of 7 and other nations planned to offer direct aid to Brazil as well as export-import financing to keep trade flowing.

The United States was expected to tap into the Treasury Department's Exchange Stabilization Fund for its contribution, but it was unclear how much money Washington would offer Brazil. Use of the fund has raised hackles in Congress in the past because many lawmakers resent that Treasury Secretary Robert E. Rubin can use the money without a green light from Congress.

Washington's package will also include a large increase in trade finance to help Brazil buy goods from the United States.

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