Originally created 01/19/99

Brazil vows to drive ahead with reforms



BRASILIA, Brazil -- Desperate to heal its financial wounds, Brazil permanently floated its beleaguered currency on Monday and sought to assure the rest of the world that it will drive ahead with further tough reforms. Global markets rallied on the news.

Brazil's finance minister, Pedro Malan -- anxious to win investors' confidence and another piece of a $41 billion international aid package -- was in Washington to explain to the Clinton administration, the International Monetary Fund and investors how his government will meet its reform promises.

President Fernando Cardoso, meanwhile, defended his government's move to end once and for all its expensive four-year defense of the currency's value, saying it was a necessary first step in efforts to turn around the economy.

"We are moving into a new phase where we will need to put into place as rapidly as possible the fiscal austerity plan so interest rates could fall and Brazil can begin to grow again," Cardoso told a joint news conference with the heads of both houses of Congress.

The United States fears that if Brazil succumbs to an Asian-style currency crisis, its economy -- Latin America's largest -- could drag down other countries in the region.

Plunging currencies and a loss of investor confidence could cause a regional economic contraction, which in turn would affect U.S. exports and hurt the U.S. economy, which has about 2,000 American multinationals doing business in Brazil.

On Monday, the Central Bank made permanent a temporary decision last week to allow the currency, the real, to trade at market rates in foreign exchange trading without any intervention. The move risks sparking a new surge of inflation.

The value of the real -- which closed Monday at 1.59 to the dollar -- has plunged 24 percent from its value late Tuesday, just before the government made its first steps to devalue the currency.

Before floating the currency, the government had spent $45 billion of its foreign currency reserves to prop up the real in a bid to curb inflation. The Central Bank used to intervene by spending reserve dollars to buy reals, driving up their value.

With the devaluation, Cardoso said, "we are more dependent on ourselves. ... We no longer have to worry about speculators."

World markets applauded the news with sharp gains, especially in Europe. London's Financial Times Stock Exchange 100 index rose 3.1 percent to close at 6123.9, while all Europe's main markets posted gains. Hong Kong's Hang Seng Index jumped 2.5 percent, while Tokyo's Nikkei Average backed off a surge early in the day to close up 0.48 percent. Wall Street was closed Monday for Martin Luther King Jr. Day.

On Brazil's largest market, the Sao Paulo Stock Exchange, share prices closed up 5.4 percent on top of a stunning 33 percent gain Friday.

Brazil has received around $9 billion of a $41.5 billion IMF-led rescue package and it is now seeking the release of $9 billion more.

But the fund is requiring that Cardoso's government first impose tax increases and budget cuts to reduce the deficit.

"We will undertake all efforts we have submitted to the fund," Finance Minister Malan told reporters at IMF headquarters in Washington. "We know additional measures may be required."

IMF Managing Director Michel Camdessus said in a statement that he was "personally very satisfied with the conversations that IMF staff and management have had" with the Brazilian team.

He welcomed Malan's pledges on attacking the budget deficit and said an IMF team would go to Brazil to consider adjustments to IMF targets in light of the currency devaluation.

Malan also met with Deputy Treasury Secretary Lawrence Summers on Sunday and was to hold talks with Federal Reserve Chairman Alan Greenspan on Monday.

"The moment requires that we be aware of our responsibilities and be austere in balancing our accounts," Cardoso said earlier Monday as he attended the inauguration of a VolkswagenAudi plant in the southern state of Parana.

Cardoso is seeking quick approval of austerity measures to cut the 1999 budget by about $23 billion. Senate President Antonio Carlos Magalhaes pledged to pass the measures as quickly as possible even if it means gathering legislators for weekend sessions.

The fiscal austerity, plus the free exchange rate, will drop interest rates to about 15 percent a year and stimulate economic growth, said Paulo Guedes, an economist in Rio de Janeiro.

The measures, which have stalled in Congress, would increase social security taxes and place a tax on all banking transactions, yielding $4.5 billion this year and $7 billion next year, said Communications Minister Pimenta da Veiga.

But approval by the fractious Congress could be complicated by increasingly vocal opposition from state governors, who claim they lack the means to pay their multibillion-dollar debts to the federal government.

Seven opposition governors were meeting Monday in Minas Gerais state to discuss their situation, after the state's governor earlier this month declared a moratorium on paying his state's debts of $10.5 billion.

The federal government, in the midst of its own belt-tightening, has refused to renegotiate the states' debts.

The global financial crisis hit Brazil full force in August, when investors withdrew their money for fear that the government couldn't cover a $65 billion budget deficit and might default on its loans.