Originally created 01/20/99

Brazil's Senate passes key austerity measure

BRASILIA, Brazil -- Brazil's Senate passed a key austerity measure Tuesday, boosting a government drive to shore up the country's ailing economy.

The 81-seat Senate voted 64-12 to raise a tax on all financial transactions from 0.2 to 0.38 percent. The measure, expected to yield $9.6 billion a year, will now go to the other house of Congress, the Chamber of Deputies, for two full votes.

The Senate vote is a boost for Brazil after it devalued its currency last week, losing the cornerstone of its economic stabilization plan: a strong currency pegged to the dollar.

A dollar peg can make a currency more stable, but it also obligates the country adopting it to defend the currency's value with such measures as raising interest rates or buying the currency on the open market with foreign exchange reserves. Brazil had taken both measures to support its real, exacerbating its economic problems.

Since the devaluation, attention has switched to Congress as it votes on an austerity plan aimed at saving $17.9 billion in 1999.

The Chamber of Deputies will vote Wednesday on a more controversial measure that would reduce civil servants' pensions by as much as 25 percent. The bill, expected to yield about $2.6 billion a year, would then go to the Senate.

"If they manage that it would be a neat show of force that Congress has done some wham-bam quick measures," said David Fleischer, a professor of political science at the University of Brasilia.

But Fleischer pointed out that about 120 Federal Deputies in the 513-seat chamber receive pensions and would be voting themselves a 25 percent cut.

The global financial crisis hit Brazil 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.

An emergency credit line of $41.5 billion put together by the International Monetary Fund helped shore up confidence in the country's economy, but the money was conditioned on approval of tough austerity measures.

When Congress balked on a similar pensions bill in December, investor confidence flagged and billions of dollars fled the country, forcing the government to devalue its currency, the real.

The United States fears that if Brazil suffers an Asian-style currency crisis, its economy could hurt other countries in the region.

However, World Bank President James Wolfensohn said in Washington on Tuesday that Latin American countries were dealing well with Brazil's financial crisis.

Nose-diving 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.

The Sao Paulo Stock Exchange responded positively to the devaluation, climbing an astonishing 33.4 percent Friday -- the day the government removed restrictions of currency trading -- and 5.4 percent Monday. On Tuesday, apparently spurred by the Senate's vote, the stock exchange closed up a further 3.8 percent.

Meanwhile, the real closed slightly stronger: at 1.56 to the dollar compared to Monday's close of 1.59. That amounts to a decline of 22 percent since the government began a series of steps last week to devalue it.

One of the reason for the devaluation was to give the government some room to lower interest rates, raised to stem the flow of dollars out of the country.

But those interest rates -- some of the highest in the world at around 29 percent -- were crippling the economy and also forcing Brazil's public sector debt to grow exponentially. It now stands at around 8 percent of Brazil's gross domestic product (GDP).

On Tuesday, however, the government hiked interest rates to around 32 percent to head off inflationary pressures. By raising rates, analysts say, the government also gains more bargaining power to convince the opposition to pass the reforms.

Finance Minister Pedro Malan told reporters in Washington it was too early to estimate the impact of the rates on the country's burgeoning public deficit.

Malan has been in Washington since Friday, attending meetings with the International Monetary Fund, the World Bank, the Inter-American Development Bank and the U.S. Treasury.

Brazil has received about $9 billion of the IMF-led rescue package and is now seeking the release of another $9 billion installment.


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