Carlos Feu Alvim
The Evolution of the Public Debt
In its issue number 04, e&e
published - without comments - a survey of the Brazilian debt evolution which we
considered and still consider a crucial parameter for the Brazilian economy. In this issue
we update the statisticsand comment its behavior.
The Brazilian public debt was identified at the start of the Collor administration as
the cause of the inflationary conjuncture that existed at the government transition. It
was the tiger that the President promised to kill with only one shot. In December 1989 it
has reached 100 billion dollars by the official exchange rate at that time.
The economical measures of the Collor Plan I - launched in the first daysof his
administration - were able to reduce in almost 80% the net public debt and turned it
negative ( credits superior to the debts) for the Federal Government.
Part of this magic is associated with the confiscation that every plan for fighting
inflation has enclosed, including the Real Plan, which was made previously in the URV
(referential value unit) phase. Another part is related to the confiscation of assets -
such as the guaranteed gold deposits and the valuation of the Brazilian currency - with
the consequent reduction of the debt expressed in dollars - by the retention during a
determined term of a large fraction of the financial assets.
Just like the debt, after the Collor Plan, seems undervalued when expressed in dollars
so is the present debt overvalued by the valuation of the Real relative to the dollar,
after the former currency was created. The apparent contradiction that an over valuation
of the national currency generated opposite effects derives - as will be seen in what
follows - from the fact that in December 1991 most of the debt was external and at the end
of 1997 most of the debt was internal
The limits of the debt
To express the public debt as a function of the GNP eliminates in part this distortion
since one compares two magnitudes measured in more compatible currencies ( not entirely,
since part of the public debt is external). On the other hand it is evident that a country
with a large production capacity has a larger capacity to get into debt and, mainly in
long term comparisons, this is a more interesting parameter for analysis.
The historical evolution of the public debt was show previously in the book O
Crescimento Possível - Editora Bertrand do Brasil 1996 - and is updated in Figure 2 until
October 1997. In this book we tried to determine the limits for the Brazilian economical
growth. In what concerns the public debt it was clear that 40% of the GNP corresponded to
an upper limit for Brazil. Every time that the debt approached this limit, a vigorous
change of direction became necessary.
On the other hand, inside the historical process shown in Figure 2 one can notice that,
contrary to what many subconsciously admit, the years of the Juscelino Kubitcheck
administration were not those of public debt accumulation ( at least the nominal one). The
years of the economical miracle under the military government (the seventies) accumulated
a relatively modest debt in terms of GNP. The debt exploded in the eighties when it was
necessary to generate a large exportable surplus in order to pay the foreign debt, with
fiscal incentives, official exchange rate rigidly controlled and absorption by the federal
government of dollar debts from individuals and enterprises It could be said from the data
shown in Figure 1 (relative to the GNP) that the public debt situation, even coming close
to 40% is less serious than it seems, since the data are influenced by the exchange rate
distortion. Of course this is only true if it will be paid in reais.
Paths for Reducing the Public Debt
If , by a prompt governmental decision, the real should be devalued in 40%, the
internal debt in dollars would decrease 40%.Incidentally, it is just that which renders
the creditors nervous. In a certain way this is what was internally made in the different
heterodox plans - and even in the orthodox ones - aiming at a sudden inflation decrease.
Since this measure affects the external market - without a visible crisis that would
justify it - it has been rejected by the authorities due to the bad reflections that it
certainly would bring, at least at the beginning, at the international level.
In issue number 5 of e&e we
have analyzed the situation of the Brazilian international reserves and we called
attention to its direct costs ( in the present issue we computed the indirect ones) and we
said that, even though it is an expensive instrument, reserves act as an stabilizer for
the real. Nevertheless, in our evaluation, the most important guaranty that it offers to
Brazil - at least in the short term - is the value of the public properties liable to
privatization which would surpass one hundred billion dollars.
Nevertheless, it should be remembered that public properties are not endless and if
they are used to attract external currency it will become a factor for dividend export in
the future. The country would be exchanging a debt without guaranty for one with guaranty
and the payment of interests for dividends.
It can be observed in Figure 1 that there was almost a stabilization of the public debt
in 1997. The privatization helped in maintaining this situation; the commercial balance
deficit made also a contribution, which is - in the short term and paradoxically - a
positive factor for public finances.
If the process is maintained and after selling the state-owned enterprises the public
debt amount remains the same, the government would be in the difficult situation of owing
40% of the GNP and not having assets to guaranty it. In order to pay 3% interests monthly
over 200 billion dollars it would be necessary to privatize two Vale do Rio Doce monthly
to maintain the debt stable . That is, the present interests can only be applied in the
Finally, it remains the orthodox process of increasing the income and reducing the
expenditures of the government which is being tried in the present circumstances. The
possible and desirable solution for the present conjuncture involves a mixing of the three
In the present situation, in order to pay the interests on the public debt, the
government would have to generate a superavit of 10% of the GNP which is evidently
impossible. Therefore, it would be necessary a delicate operation for maintaining the
currency's reliability , reduction of both interests rate and exchange rate discrepancy,
expenditure restriction, good administration of privatizations and increase of revenues.
All this in an election year.
This circumstance - which occurred in the last presidential election in Argentina - is
inconvenient not only for the government since it is of no interest for the international
community or for the economic forces a sudden change in a delicate situation. As it
happened in the neighboring country, the political ability may turn the crisis into a
favorable factor for reelection and the election risk may be useful to obtain, internally
and externally, economical conditions to overcome the crisis.
External and Internal Debt
Currency convertibility breaks the division between external and internal debts. In
October 1997 the net external public debt increased to about 8 billion dollar. The Central
Bank had not officially made known until the beginning of January 1998 the reserve
losses, even though the amount had been published by the Brazilian press. Figure 3 shows
that, as should be expected, during a month period the variation of the net public debt
follows (with opposite sign) the reserve variations
The difference would lie in the international interests paid which, in periods of large
variations, are a small fraction of this variation Therefore, the readers of e&e are
informed that, by indirect data from the Central Bank, the decrease of reserves in October
1997 was about 8 billion dollars. This caused the interests shock and the expenditures
restraining measures announced by the Government at the occasion. News in the press in the
beginning of January 1998 tell about the recovery, at least partial, of the reserves. What
occurred previously in Mexico and is occurring in some Asian countries is that doubt about
the credibility of the currency provokes a sudden conversion of the local currency into
another one (mainly dollars).
At the start, the internal debt is converted into (net) external debt as the reserves
are gone or into gross external debt when emergency loans are made. When these resources
are used up there is no other way out to the country but the devaluation of the currency
which it had avoided at the start of the crisis. International help becomes the only
solution and it is necessary to accept IMFs bitter medicinein order to continue
participating in the international financial and commercial community.
The correspondence between external and external debt is illustratedin Figure 4.
The net ingress of external capitals from 1992 on had permitted to maintain stable the
external debt, build the reserves and even finance the commercial balance deficit in the
last two years.
The reserve increase allowed to reduce considerably the net external debt. This was
done by paying positive real internal interests , much higher than those of the world
market. As a consequence, the internal debt was raised and it may convert itself
into net external debt as far as the reserves are reduced, like it occurred in October.
The need of taking external loans for paying the internal debt resulting from the
ingress of external currency would also provoke an increase of the external debt.
In what concerns the debt of the Federal Government it is interesting to examine
not only the net debt evolution but also what are the credits deducted from the gross
debt. This is particular important when it is known that the average term of the Federal
Government's internal debt is a few months. In figure 5 one can observe that until 1991
the government-owned companies were the largest debtors of the Federal Government. From
1992 on the "other credits" grew in importance. They have included the reserves
- which are the largest share and really available in the short term - but also credits
owed to individuals and not available in the short term. There has been a large increase
of the debt that states and municipalities owe to the FederalGovernment within the
restructuring process of its debts which is not finished yet.
The Federal Government has been making efforts so that the states use privatization in
order to deduct part of the debt, otherwise they will be paid - if they will - in the long
term. As to the government-owned companies, most of their debts have been absorbed by the
government in the process of rendering them liable to privatization. In some cases, the
debts of government-owned companies from the states are listed as credits in the Federal
Government for these states.