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Toss a Life Buoy to Brazil

July 06, 2002

Not even Brazilians' whooping ecstasy at winning the World Cup this week could counterbalance international investors' deepening melancholy about that South American nation's economy. Brazil's stock prices are foundering, and last week J.P. Morgan's bond market index had Brazil as a riskier investment than even impoverished, overcrowded Nigeria.

That doesn't make much sense. With a population of 175 million spread across 3,261,200 square miles, Brazil is Latin America's largest country and produces enough steel, autos, chemicals, machinery, shoes and other products to generate a gross domestic product of about $500 billion. Yet investors seem to believe that among the main emerging economies, only Argentina, which defaulted on its debt in December, is a more hazardous place to put money.

International investors have both economic and political concerns about Brazil.

First, the nation has enormous debt--55% of its GDP. However, leading international economists believe that Brazilian authorities' astute handling of the economy after a 1999 devaluation crisis shows they have the brains to finance the nation's debt without creating the chaos that plagues Argentina.

The fact that most of the debt is domestic also works in Brazil's favor, since much of it can be financed in local currency and, for the most part, negotiated with Brazilian institutions. That means it isn't so strongly subject to the exchange variations of the dollar that have caused havoc in Argentina.

Besides, Brazil has displayed much stricter fiscal discipline than Argentina. This has allowed the Brazilian treasury to run a primary fiscal surplus--the surplus before interest payments--of more than 3.5% of GDP.

Investors' political worries hinge on the possibility that come October, Brazilians may elect as president left-wing politician Luiz Inacio Lula da Silva. Lula has hinted that he would follow the same fiscal discipline as President Fernando Henrique Cardoso, at one time considered a leftist. Everywhere Lula's Workers' Party has won power it has earned a reputation for clean government and responsible management. But a clearer commitment to disciplined free-market economics could ease investors' minds.

Trouble in Brazil means big trouble in the hemisphere. Argentine President Eduardo Duhalde has urged the International Monetary Fund to provide whatever help Brazil needs. Likewise, the U.S. cannot afford to let Brazil face its economic challenges alone.

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