Economy & Energy
|Crisis, Debts, Economy Measures, Plans and Inflation
The Brazilian Crisis
Now (beginning of October 1998) it is official : the Brazilian crisis exists.
The medium term vision of e&e has the advantage of reviving in our memory a relatively recent past that we rather want to forget. We understand that this vision is a way of being realistic in times of euphoria or depression. We tried to show in our last issue that in Brazil, with the necessary corrections which imply changes concerning relationship with external and internal capital there are conditions to grow in spite of the crisis or even because of it.
In his notable and recent book "O Capitalismo Global" Editora Paz e Terra 1998 Celso Furtado tells that the 29-30 crisis produced in Brazil in 1932 the important internal rebirth based on the national market. If we have the good sense to preserve our common market the amplified Mercosul we would even have greater chance to recover rapidly.
Following the inflation and interests track Plans and confiscation
In spite of the large range of economy measures, plans, currency, the Brazilian common man seems to believe in the last plan. In the case of the Real, his hopes have lasted longer and we should hope that the present problems will not result in more disappointment which could damage for good this confidence which logically is not infinite.
All plans previous to the Real aimed at combating inflation and were motivated by critical situations in the external and internal debts. Explicitly or implicitly all plans brought with them some form of confiscation. The most serious of them was the Collor Plan (the first one) which confiscated or retained directly the different forms of existing assets, including bank deposits and gold applications. All other plans, including the Real, confiscated the indexing relative to the last months inflation.
Nevertheless, it should be recognized that the form of presenting the Governments indexes and the "corrections" made on the independent indexes, FGV and FIPE, for example, made this loss much less visible and except for the internal decisions of some tribunals in favor of their staff , up to now, there has been no claims of salary corrections for loses due to the plan. The currency stability for a longer time made easier the acceptance of the average value as a basis for fixing salaries in value reference units URV (in Portuguese), later converted to Real.
With rumors of new economy measures and new plans, we will try to revive our memory of the previous plans. Many of them brought also new currencies. Before the plans of the latest years, there was a change of currency only in the Vargas Administration when the mil reis was substituted by the cruzeiro. Since then, the currency changed name many times, some of them for simply eliminating the inconvenient zeros, others associated with stabilization plans. The first of them was the Cruzado Plan of Minister Dilson Funaro in the Sarney Administration. A monthly table of the inflation is the best chronology of the different plans. Some of them did not even deserve record due to the extremely short influence that they had. Figure 1 illustrates this trajectory.
Figure 1: (soon in english)
Monthly interests and inflation rates
-- nominal interests -- inflation -- real interests
The inflation data are from the IGP DI of Fundação Getúlio Vargas (1). The interests paid by federal bond are also indicated in the figure. The apparently little difference between the nominal interests and inflation determined the gains and loses in these applications.
The gains and loses of an investor on Federal Government bonds
Figure 2 shows the real interests rates and the gains and loses accumulated along the years of inflation and economy measures. The real interests were obtained by subtracting from the nominal interests the inflation measured by the IGP DI on a monthly basis. The percentage gains (or loses) accumulated represent the situation of a citizen who would have invested, for example, 100 monetary units in January 1st, 1980.
Figure 2: Real interests rates and accumulated gains and loses
At the end of 1982, his capital would have lost 24% of its real purchase power. His money from then on would start to recover and in the eve of the Cruzado Plan it would be worth almost the 100 units initially applied. What followed the Cruzado Plan was an alternation of negative and positive interests. In the eve of the Bresser and Summer Plans, the investor would have at last recovered the initial value of his investment and in what followed he would lose again with the months negative interest of each plan. When the country was surprised by the "only and straight shot" of the Collor Plan which would "eliminate inflation for good" , investors were celebrating, within several months of Minister Mailsons "beans with rice" politicy, real gains of 24%. Within 5 months our investor of 1980 would finally gain 12%. In the following three months our man would have already lost 26 percentage points and his capital would be reduced to 77 monetary units in constant value.
The unbelievable and oscillating real interests in the second semester of 1991, which reached 7.2% in one month recovered the value of our investor who in February 2, 1991 was a victim of the second shot, the Collor II Plan.
As has been shown, along more than one decade, Government bonds acted only as a precarious shield against inflation for people or institutions who had access to this not quite currency. Only some well informed speculators managed to gain money by buying and selling these certificates at the convenient time.
Fitting into the international style with some national creativity
The party for investors on federal bonds started only in 1991 when Minister Marcílio Marques Moreira, , who took the control of the economy in May of the same year under the Collor Administration, started to implant the "Washington Consensus" recipe which was to be continued by the economical staff that implanted the Real. The year 1991 was marked by two very relevant facts, namely the interests decrease and the dismantling of the Soviet Union, making room for the neoliberal avalanche that swept the world.
The result of this "party" permitted our hypothetical investor to accumulate, even considering the loss of the Real Plan, a gain of 290% between September 1991 and September 1998 .That is, in 7 years the real value of his capital quadruplicated. Our investor of 100 monetary units in 1980 changed from 80 units in September 1991 to about 320 units with the same buying power in September 1998. There is no licit productive application of reasonable proportions that provides such results. This is more clearly true in governmental investments.
The internal debt that is turning into external debt or
This is mainly the reason why in the same period, the net Brazilian public debt changed
from about 30 US$ billion to 250 US$ billion, as can be seen in the graphic bellow (Figure
3). The takings from privatization managed only to stabilize it during some months.
Figure3: Brazilian Public Debt: Total,
Federal and Local Governments and State Owned Enterprises
This happened because there were no political conditions to continue with the measures aiming at cutting public expenditures which could deepen recession. The cuts in public expenditures were on the limit by the end of the Collor Administration and it would be difficult to knock them out in order to continue the same type of policy, which would bring risks of social chaos. These measures could have not produced feedback to the policy of high real interests.
Since the public debt was at considerably low levels at the end of 1992, the interests alone would not explain the present amount.
The decrease of the international interests rate made available credit resources that only later on were recognized as "swallows". In order to have these capitals it was necessary to adapt oneself to the recipe that included freedom of movement for these capitals and currency convertibility. It was then instituted a stock of international reserves based on the emission of Government bonds which were (see previous articles e&e 5 and 6), according to our evaluation, the "seed" which gave birth to great part of our present internal debt. The present crisis, if the country obtains the international help it needs, will be partly transformed into external public debt.
The superposition of reserve evolution and real interests rate in Figure 4 shows that in the formation and maintenance of reserves demanded in the first years of the Real extremely high interests rates that would blush the present Brazilian monetary authorities. At that time it was also necessary to react against the Mexican crisis which almost spoiled the Real and demanded brutal raises in the interests rates. The crisis in the Far East and in Russia (and in Brazil?) provoked as well the increase of interests rates.
Figure 4: Brazilian international reserves and real interest
rates (soon in English)
----- Real Interest rates ----- Brazilian international reserves
Since the debt amount increased the present rates which may be considered relatively modest as compared to the previous ones they have more serious consequences for the public finances.
The combination of factors and the feedback they produced reserves formation, debt, government expenditures and high real rates determine the conditions that were internationally triggered. The incorrect fixing of the exchange rate as we intend to show in a next article was induced by the need to remunerate the reserves in the post Real and during the Mexican crisis.
The "swallows" are flying and the net public external debt which the Central Banks President recently declared as being "zeroed" grows with the flight of reserves and with the use of loans from the IMF and other sources. In previous occasions, the increase of interests rates made them fly back. The debt growth and the international uncertainties have frightened them away again. We think that it would have been better if they had not come at all.
1. Attention: we have used for June 1998 and previous months the original data from FGV and not data from the Central Bank which reduces the inflation of the month after the implantation of the Real to 5.4% instead of 24.7% calculated by FGV. The difference is due to the fact of not using the conversion value of 2750 CR$/R$ but using the inflation of the URV in June and July 1994. This difference exists also in other indexes listed by the Central Bank such as IPC-FIPE, IPC-BR. Modestly we agree with the entities that calculate these indexes (FGV and FIPE) since there was clearly a succession between the two currencies by the factor officially fixed.
It should be remembered that it is mathematically impossible, in a closed economy, for a stabilization plan to remunerate all production factors by their maximum value in the new currency. This would mean a maximum value relative to other prices, which varied notably in an inflationary situation that motivated the plan.
The policy of paying salaries and other factors by the average value is in principle neutral.. Since in the Real Plan there was during a relatively long time period a certain price stability and the prices fixed in URV were accepted by a large part of the population that could judge, on the other hand, the positive effect of price stability.
Actually, some gain was possible in some of the components because the Brazilian economy is not a closed one, there was internal gain in some production factors as a consequence of price reduction in imported products.
It should still be remembered that these gains are limited in their amplitude and time since external trade (average of exports and imports) has been along the last decades about 7% of the GNP and probably will continue so in the next ones. On the other hand, a commercial deficit as that we have experienced in the last years is unsustainable in the long term. We believe that this is valid even for the United States, which in the last years has been accumulating successive deficits, compensated by the import of external capital.