Economy & Energy
Ano II - No 11 November/December 1998

ollaoro.gif (978 bytes) Main Page
ollaoro.gif (978 bytes)The regulating state in ES
ollaoro.gif (978 bytes)The Non-Governmental Organization e&e
ollaoro.gif (978 bytes)Eletricity in Brazilian Energy Balance
ollaoro.gif (978 bytes)Insolvency in the Enterprises and Public Debt
ollaoro.gif (978 bytes)Brazilian Energy Balance 1998
ollaoro.gif (978 bytes)e&e links

Graphical Edition:
Editoração Eletrônic
Friday, 11 July 2003.


Carlos Feu Alvim

The prestige of. the Real plan devastated adversaries at President Cardoso’s first election, the fear of loosing its advantages reelected him in the first ballot. Nevertheless, the plan accumulated in these first five years of its application a considerable economical passive whose importance is coming out with the present crisis.

The Real plan should be credited to be five years old and not four, since the measures that characterize it were taken along the previous year of its launching. Incidentally, this fact legitimates the plan’s paternity claimed by FHC. As a matter of fact, when the plan was launched he was no longer minister.

The most visible expression of this passive debt is the internal public debt, which amounts to 300 billion dollars. The gross and net external debts have also increased. More than that, there is an amount evaluated to be about 100 billion dollars initially accumulated as external reserve, absorbed in the internal debt bonds and multiplied along these five years by real interests never seen before in the history of the country. Part of this amount has already left the country due to the mistrust of some investors who constituted it. This has already resulted in an increase of the net external debt.

The mechanism of this transformation of the internal debt is well known and the recent crisis in the East and in Russia gave various examples. The internal debt grows and provokes mistrust in creditors who start leaving the country exhausting the reserves. In order to compensate them for the risks, the interest rates offered by the government are raised. This makes the debt grow and increases the creditors’ mistrust and reduces the payment term.

Since there is convertibility and a speculative attack could quickly drain the reserves, the country looks for external loans with IMF’s approval, which in its turn requires hard corrective measures in order to grant it.

Up to this point, the same film has repeatedly been seen in Brazil.

Now, in the best hypothesis, this vigorous correction will allow for a re-equilibration of the internal and external accounts and the country will leave the crisis with a considerable addition to the external debt. The global debt will considerably surpass the initial internal debt which originated the problem, since to it will be added the high interests rates used in order to retain the capital up to the point when the external help arrived. We know now that the external interests rates will also have a considerable spread.

Once the balance is established, it is started a recession period in which the wealth that would be used for development is exported abroad. This is what happened in the lost decade of the eighties when, it should be remembered, there were considerable commercial surpluses.

What now really distinguishes Brazil from South Korea and other countries facing crisis is that we still have assets that can be used to diminish the debt. Nevertheless, these guaranties are less significant as time goes by and the debt increases. The selling of the telecommunication companies – the most precious jewel left to the crown – had as net result the amount corresponding to three or four months of internal debt interests.

When a company has a good economical situation and a bad financial one – and the creditors put pressure on it – it runs the risk of bankruptcy if it submits itself to the interests imposed by usuriousness (even the official one). If it chooses to sell its assets quickly in order to prevent bankruptcy it accepts prices bellow those of the market - in many cases, the owners maneuvering in order to save their personal assets - and it hardly escapes the bankruptcy it wanted to prevent.

A last resource is the arrangements with creditors to prevent insolvency which – when well administered – turns to be the best solution for the debtor company and the set of creditors.

The main consequence is the immediate reduction in interests. On the other side, if in the first case the rapid selling of assets means liquidation by depreciated prices, in the second case, through agreement with the creditors, one can exchange the same assets for a devaluated debt. Since it is the interest of the creditors that the company will recover.

In the situation that led to bankruptcy only some creditors recover their investments, in the arrangements with creditors to prevent insolvency, all creditors recover part of their assets and, if they are lucky, they recover all their applications.

In the case of countries there is no bankruptcy or arrangements with creditors but – once the difficulty is declared – an agreement with the creditors can be made or, as long as the government gets hold of the situation, it can impose some rules for the internal creditors stretching the term of the debt through the emission of bonds.

In the case of Brazil, these bonds could be used in privatization. As compensation – and some protection for the national capital – one could even think of amplifying the specter of enterprises liable for privatization.

Previous experience in the country indicates that a public debt greater than 40% of the GNP is unsustainable. Before the internal interests consume the public assets that could be used for paying it, it would be desirable that a national pact would equate the debt. This preoccupation should transcend political, party and class interests.

In this way, a large part of the additional taxing load destined for paying the interests would be avoided. This load is already threatening the economy and even preventing it from generating the goods necessary for paying the debt.

The difficulty in adopting it would be, in some way acknowledge that the king (or the Real) is naked.