The Cost of International
Reserves II or the Invisible Debt
Carlos Feu Alvim
feu@ecen.com
English Version:
Frida Eidelman
frida@password.com.br
In the previous issue we have evaluated the
direct cost of the international reserves. From December 1991 until October 1997it was 31
billion dollars. This cost stems from the fact that the reserves are absorbed by bonds of
the public internal debt for which the government pays much higher interests than it
receives in the external market. In the last months of 1997 the Federal Government was
paying internally 3% monthly as real interests while receiving 0.4% in external
applications of its reserves Even before the October crisis, the difference of direct
interests linked to reserves represented a monthly cost of 600 million dollars ( 1% of 60
billion dollars).
The evaluation made in e&e
number 5 did not consider - as we have been remembered - the direct costs over the
amount of the reserves, since we have not computed the interests over the accumulated
capital because these applications are incorporated to the internal debt.
Taking into account this accumulation, the cost reaches 45 billion dollars. That is,
the investors could draw in August 1997 105 billion dollars (US$ 60 billion of reserve and
US$ 45 billion of accumulated interests). This is only a speculative value since the real
value depends on the use and origin of these reserves.
It would also be valid to estimate the effect of the high interests needed to maintain
the reserves on the amount of the external debt. This is a subjective concept since it
probably existed the necessity of offering sufficient return to the internal investor to
restrict consumption. In order to evaluate the influence of reserves on the increase of
internal interests we would have to arbitrate what would be the "normal" real
interest and compare it to the one caused by the necessity of maintaining the reserves.
There are two ways to do it: one is to compare the present interests with those
previous to the policy of increasing the reserve volume and the other is to compare it to
rates paid by countries that adopted a similar policy.
As we have shown previously, in the eighties the real interests were close to zero: the
investor was satisfied with compensating inflation. Periods of clearly positive interests
were at once compensated by confiscation of each economic plan. Conservatively, we prefer
to consider in our estimates as normal the prime rate plus a spread of 3% annually. This
is a value coherent with the rates reached in other countries which have convertibility in
order to attract reserves. The effect of maintaining high interests instead of
"normal" interests would be, in the period considered, about 89 billion dollars,
reaching a total cost of 133 billion dollars to maintain average international reserves of
about 40 billion dollars between December 1991 and October 1997.
Should it be 30, 45 or 130 billion US$, the cost to maintain the reserves is expressive
and this stabilization mechanism, in our opinion, should be evaluated.
In the eighties, when the interest explosion multiplied the Brazilian external debt it
was usual to say - as a consolation - that part of that debt was visible since it resulted
in works, many unfinished, started in the seventies. For example, one could see Itaipu
producing electricity, the unfinished Angra 2 nuclear power plant and the tunnels and
bridges of Ferrovia do A?. Other countries have profited from easy credit in the
seventies to increase consumption and had in the eighties an invisible debt. As one of my
friends reminded me, now we have too our invisible debt. |