The Speculators’ Attack: From East Asia and Rubland to Latin America
As Wall Street speculators expand their deadly forays, the global financial crisis has reached a new high point. Under the attack of the speculators, the stock exchange in Sao Paulo broke on Black Wednesday, the 13. January 1998, together. The vaults of the Brazilian Central Bank were blown up; the "dragging along" Tie of the Real to the Dollar was broken. Gustavo Franco, director of the Central Bank, was replaced by Professor Francisco Lopes, who, together with Finance Minister Pedro Malan, immediately left for Washington to meet with the IMF and the U.S. Treasury Department in a meeting on the financial crisis "Consultations" on the highest level.
Public opinion had been cleverly misled; the Asian flu was supposedly spreading "Asian Flu" from… The world media had almost incidentally made Itamar Franco, governor of the state of Minas Gerais (and a former president of Brazil) the "Jack of all trades" and blamed it for iing a suspension of payments to settle debts owed to the Brazilian federal government.1 The threat of the imminent cessation of payments by states had reportedly caused Brazil’s "economic credibility" influenced.
Brazil’s National Congress was also accused of asking misleading questions and not responding quickly enough to the IMF’s deadly economic medicine in December "blind consent" to have given. The latter necessitated $28 trillion in budget cuts (including massive layoffs of public officials, dismantling of social programs, sale of government assets, freezing of transfers to Brazilian states, and use of government revenues to pay debts).
On the weekend of 16. to the 17. January, Finance Minister Malan and Central Bank Director Lopes were in Washington for high-level talks, on Saturday at the IMF headquarters and on Sunday in the rooms of the U.S. Treasury Department.
"Some officials, considering the time and effort that had gone into the original (IMF-sponsored and negotiated in November 1998) program, were (initially) outraged by the lack of consultation on Brazil’s part regarding the decision to abandon the peg of the real, which Tuesday (the 12.) was made late in the evening".2
Michel Camdes, Managing Director of the IMF, later admitted that "this was a wise decision to prevent the loss of reserves", although at the same time he stressed that he expected Brazil to meet the fiscal targets according to the financial agreement of the Fund, which was signed in November. The regime of the flexible exchange rate was also approved on condition that the "extremely high" domestic interest rates remained in force and no foreign exchange control (which could prevent institutional investors from transferring their money in and out of the country) was introduced.
Crop the credit
By insisting on tight financial policies, the Washington-based institutions were also intent on destroying Brazil’s industrial base, taking over the domestic market and accelerating privatization programs. The government’s fixed interest rate was reduced to an astonishing 32.5% (per year), which for commercial banks implies loan rates between 48.7% and 84.3% per year implied.3 Regional production, crippled by irredeemable debt, had been driven into bankruptcy. Purchasing power had collapsed; interest rates on consumer loans ranged from 150% to 250%, resulting in massive loan delinquency…4
Approval by the Washington consensus
Just days after Black Wednesday, Michel Camdes, Managing Director of the IMF, buried the following in a prepared press statement "… the confirmation of fiscal consolidation as a top priority (…) together with structural and privatization measures, which are part of the program accepted with the Fund, the real".5 James Wolfensohn, President of the World Bank, and Joseph Stiglitz, Vice President – known for his recent criticism of the IMF’s high interest rate policy in East Asia – expressed their support:
"We are pleased with Minister Malan’s final report on his meeting in Washington and welcome his invitation to intensify our dialogue."6
The increase in the price of bread
On the morning of Monday, 18. January, the Sao Paulo Stock Exchange had recovered briefly and recovered some of its losses. While the "Trust" The real had lost more than 20% of its value in less than a week. By the end of January, more than 40%, which led to an almost immediate increase in the price of gasoline, food and basic consumer goods. The decline of the national currency has helped to print the standard of living in a country with a population of 160 million, more than 50% percent of whom live below the poverty line.
Conversely, the devaluation had repercussions on Sao Paulo’s southern industrial belt, where the official unemployment rate was 17% in 1998. In the days leading up to 13. In the days following January 13, Black Wednesday, multinational companies, including Ford, General Motors and Volkswagen, confirmed that they were shutting down operations and that there would be massive layoffs.7
Green Light from Wall Street
After his hectic weekend workload, Finance Minister Malan rushed to New York for an early morning meeting at the Federal Reserve Bank (Wednesday, 20. January): on the "Breakfast List" were George Soros, Quantum Hedge Fund, Citigroup Vice President William Rhodes, Jon Corzine of Goldman Sachs and David Komansky of Merrill Lynch.8
This private behind-closed-doors meeting with Brazil’s "Believers of the last refuge", was crucial: Rhodes had chaired the New York Banking Committee as a representative of 750 creditor institutions; he had first negotiated with Fernando Henrique Cardoso, while he was still Finance Minister, to restructure Brazil’s external debt under the Brady Plan.9The latter coincided with the enactment of the 1994 Real Plan on behalf of creditors and speculators. The dollar-linked exchange rate, combined with the structure of high interest rates under the Real Plan, led to the inflation of the domestic debt from 60 billion to more than 350 billion in 1998…
Although the results of the breakfast meeting were not made public, Bill Mac Denough of the Federal Reserve Bank (who had carefully organized the event) confirmed that it was widely believed that Brazil’s domestic and foreign debts were within manageable limits:
"It is not necessary (at this time) to redefine Brazil’s foreign debt".10
Finance Minister Malan, who fully yielded to his Wall Street bidders, agreed: there will be neither "a renegotiation", nor give a cancellation of the debts…11
The Background to the IMF Agreement
At first glance, Brazil’s predicament appears to be nothing more than a "Standard repetition" of the Asian currency crisis of 1997. The deadly "oconomic medicine" of the IMF largely resembles that which was administered in 1997-98 in Korea, Thailand and Indonesia. But there was a striking difference in the timing (z.B. of the chronology) of the IMF plan: In Asia, the "bailout" of the IMF on an ad hoc basis "to" and not "before" of the crisis negotiated. In other words, the IMF came to the rescue only after the attack of the speculators, after the national currencies had fallen into disrepair and the countries had been left with enormous debts.
In contrast, the IMF’s financial operation in Brazil became "previously" and negotiated as part of a new IMF-G7 arrangement. The "okonomic medicine" should rather "PREVENTIVE" than "a cure". Officially, it was intended as a means, "the occurrence" of a financial disaster "to prevent". Moreover, the money in this preventive plan "immediately and before" made available (not only as a result of currency devaluation).
Preventive economic medicine
This "Preventive Plan" was launched by President Clinton at the end of October. The leaders of the group of the 7 nations had agreed to, "o economically healthy nations to be of assistance", to ward off the dangers of currency speculation. It was a multi-billion dollar "Preventive funds" been established. The declared aim was to promote the spread of the "Asian flu" to other regions of the world…12
Brazil was first in line under the IMF-G7 plan: some of the money had already been earmarked for President Henrique Cardosos "Try" to support the Brazilian economy, and "to stabilize". Barely two weeks after the 13. On November 11, the Brazilian government submitted a letter of intent to Michel Camdes, the IMF’s Managing Director. A "Memorandum of Economic Policy", which was carefully drafted in the usual economic jargon and in accordance with IMF guidelines, was settled.
Detailed negotiations on a multi-billion dollar package (in real terms "a half marshal plan") had taken place. As early as July 1998, Brazil had been instructed by Washington not to interfere in the rules that would guide the multi-billion dollar trading of options and futures on the Sao Paulo Stock Exchange:
"A temporary rate control had defused the situation, but this was never agreed to by the IMF because it undermined the lucrative game of international finance…"13
Lucrative? … The sheer amount of money that was approved is unfathomable: in a period of 6 to 7 months (July 1998 to January 1999), private financial institutions had appropriated $50 billion in foreign exchange reserves (mostly settled through BOVESPA options and futures). The funds, equivalent to 6% of Brazil’s BNP, which had been lost through capital flight, were to be used in the context of the 41.5 billion dollar operation again to Brazil "RETURNED" become.
A previous fiscal judgment
Stanley Fischer, First Deputy Managing Director of the IMF, and Lawrence Summers, Secretary of State at the U.S. Treasury Department, in constant collaboration with Brazil’s Wall Street believers, have been the main actors in this multi-billion dollar ploy in Washington. The World Bank, the Interamerican Development Bank (IDB) and the Bank for International Settlements (BIS) were also involved in putting together the financial package.
Brazil’s creditors had demanded that the IMF program include the following:
"A far-reaching, prior fiscal stimulus of over 3% of GNP with reforms in the areas of social security, public administration, public financial budget expenditure management, tax policy and revenue distribution that directly confront the structural weaknesses that are at the root of the public sector’s financial difficulties".14
The final touch was put on the multi-billion dollar scam at IMF headquarters in Washington on the night of 12. November; the next morning the agreement was officially announced in a press conference by Michel Camdess, Managing Director of the IMF:
"I believe that the usefulness of the program for Brazil and the willingness of the public authorities to enforce it, together with the strong support shown by the official international community, provide the foundations for Brazil’s private creditors to act and thus help ensure success".15
And who were these private creditors who "helped ensure its success?" The same Wall Street financiers (and their affiliated hedge funds) who had already participated in the speculators’ attack on the Brazilian real …
The IMF Agreement Contributes to Capital Flight
The 41.5 billion dollar financial package intended to "Restoring confidence". Instead of helping to fend off the onslaught of speculators, however, the IMF-sponsored bailout has helped to accelerate the outflow of financial wealth. Twenty billion dollars flowed out of the country in the two months that followed the approval of the IMF precautionary measures: an amount on par with the incredible "previous" Budget cuts demanded by IMF.
Brazil’s financial wealth has been plundered by capital flight: in the months leading up to the January financial meltdown, foreign reserves flowed freely out at a rate of $400 to $500 million per day… Capital flight during the first two weeks of January was (according to official sources) around 5.4 billion dollars.
The IMF-sponsored action was mainly responsible for enticing speculators to continue their deadly raids; "The money was there", to capitalize on it. Should the Central Bank of Brazil consider defaulting on its foreign currency obligations, the IMF’s G7 availability became "Advance financing" allow banks, hedge funds and institutional investors to quickly cash in on their multi-billion dollar loot. The IMF program signed in November thus helped to reduce the risks and the "speculators to insure", dab the central bank has further trimmed the real.
In the event that the central bank’s reserves were exhausted, the state’s representatives would also have immediate access to the first installment ($9 billion) from the IMF bailout package in order to honor their foreign performance contracts. In the words of Stanley Fischer:
"One wants to are the markets that one does not cut the slices too dunn. The markets should know that there is a sufficient amount (of foreign currency reserves in the Central Bank of Brazil) that is readily available".16
The dwindling reserves of the central bank
The central bank’s reserves decreased from $75 billion in July 1998 to $27 billion in January 1999. The first installment of the IMF loan of more than $9 billion had already been squandered on trimming Brazil’s ailing economy; the money was barely enough to stem the "capital flight" In the course of a single month "to cover".
"The $41.5 billion in foreign reserves provided by the IMF were doomed from the start to end up with the speculators, leaving Brazil with an external debt increased by exactly that amount. This scenario has been played out so many times with other truths held at artificial highs with interest, that by now every school child should know the trick. The government, whose preservation is under attack, is taking foreign loans arranged by the IMF and using the foreign preservation to buy back its own preservation. The countries to which such "helped" If the loan is repaid, a foreign debt remains in the amount of the "grant", while the speculators collected the proceeds of the loans and then set out to repeat the trick."17
In the scenario described above, the approximate "Timing" The devaluation was part of the IMF’s ploy; by ensuring a stable exchange rate for a period of 60 days (January 13), the IMF allowed the speculators to keep the exchange rate stable. November 1998 to 13. January), it allowed the speculators to quickly pocket another $20 billion, while the…
Therefore, the IMF had insisted that Brazil maintain the stability of the exchange rate as part of the agreement signed in November. Capital flight accelerated after the November 1998 agreement; both Wall Street and the institutions in Washington knew that devaluation was imminent and that the IMF-G7-sponsored package of preventive measures was nothing more than a contradiction in terms "Turstopper" was.
The IMF program had thus made it possible for the currency speculators "preventive" fund enabled, "Time to buy". The central bank should continue as long as possible "as possible". The hidden intention was to provoke a financial collapse; Wall Street was prepared for it… The economic team in the Ministry of Finance was reportedly "The IMF was taken by surprise", but in reality they always knew that devaluation was imminent… In January, the IMF agreed to let the currency slide. By this time it was too late, the foreign reserves of the central bank had already been plundered …
collapse of the real
In the aftermath of the January crisis, the IMF had taken a precautionary "Ground" of 20 billion dollars in reserves recommended for the central bank. (The reserves amounted to 75 billion dollars 6 months earlier). This determination of a "Boden’s" – The IMF, rather than the central bank, played a minor role in facilitating capital flight in the immediate aftermath of the devaluation: the plundering of foreign currency reserves could continue unimpeded until they were replaced by a new currency "ground" reached. In January, the IMF had also promised to release another installment of $9 billion, which gave speculators the added advantage of raising foreign currency reserves well above the $20 billion floor.
"A Marshall Plan for creditors and speculators"
This new surge of IMF-G7 aid money should thus replenish the reserves of the Central Bank ("with borrowed money") in order to encourage a new wave of capital flight. Michel Camdes, Managing Director of the IMF (who surely knew what was coming), had already confirmed in November 1998 that "Brazilian government officials, should they need the (additional financial) resources, …. could have access to the second instalment earlier, as early as the turn of the year."18 Ironically, this was exactly when the real-dollar peg collapsed…
The IMF’s amption (both before and after the devaluation) was that the central bank should continue to plunder its foreign currency reserves. And with more (borrowed) IMF-G7 money fleeing into central bank vaults, capital flight will almost certainly continue in the months ahead, despite the 20% devaluation of the Real… Highly lucrative: in the week following the financial meltdown on 13. January, the capital flow out of the country was already between $200 million and $300 million per day.19 And Finance Minister Pedro Malan, in his breakfast meeting with George Soros and William Rhodes on Wall Street (20. January) agreed that no controls or impediments to this flow would be introduced….
Towards the inflationary spiral
A deadly economic process had been triggered: devaluation has led to an inflationary spiral, which – in addition to the application of massive austerity measures – has resulted in a brutal impoverishment of all segments of the Brazilian population, including the middle class.
In the past, wages in Brazil were adjusted monthly to the rising cost of living under the regime of a flexible exchange rate. Brazil’s current predicament, however, is obviously different from the inflationary situation that prevailed prior to the 1994 Real Plan.
In the current situation, the IMF agreement signed in November explicitly called for the removal of wages from the index. As a "Means to fight inflation". In the books of the IMF, increased wages "when the main reason for inflation was" . The state has also attributed the rising unemployment figures to this ("a necessary ubel") that increased unemployment is an effective way to reduce inflationary preres.
So, having triggered a fatal inflationary spiral through currency devaluation, the IMF now demanded the implementation of so-called "Anti-inflation programs". The latter provided a coherent framework for laying off workers and printing wages (by taking them off the index) rather than addressing the causes of inflation.
Moreover, under the IMF agreement, fiscal policy was in the hands of the creditors, who have the ability to freeze state budgets and paralyze payment processes, including transfers to governments and (as in the former Soviet Union) the prevention of regular payment of state employees, including several million teachers and health care workers.
The "programmed bankruptcy" of domestic production was made possible by the shrinkage of credit (z.B. extremely high interest rates). And one must also mention the threat of Finance Minister Pedro Malan to liberalize trade and sell (import) goods at dumping prices in order to "freeze price increases" and force domestic companies to, "more competitive" to work.20 Together with interest rates above 50%, the consequences of this policy for many domestic producers were tantamount to bankruptcy, z.B. to print domestic prices below the cost limit….
Conversely, the dramatic decline in domestic demand (a result of rising unemployment and falling wages) has led to a situation of oversupply and rising stocks of unsold goods..
This relentless decline of local industry – triggered by macroeconomic reforms – has also created an environment that allows foreign capital to take over the domestic market, strengthen its grip on domestic banks and acquire the most profitable production facilities at knockdown prices….
The financial crisis (which dates back to the beginning of the Real Plan in 1994) has thus created circumstances that will favor the rapid recolonization of the Brazilian economy. devaluation of the real will both accelerate privatization programs and further depress the real value of government assets (in real terms). The "previous fiscal approach" The IMF’s "bailout" – together with rising debt and ongoing capital flight – amounts to economic disaster, fragmentation of the countries’ fiscal structure and social alienation.
The consequences for Latin America
The financial meltdown in Brazil has far-reaching consequences for all of Latin America, where heavily indebted countries have been crippled by macro-economic reform for more than 15 years. In this regard, the financial crisis has created an environment that strengthens the grip of Wall Street believers under the IMF’s leadership on financial policies throughout the region.
In Argentina, the decline of the central bank after the arrangement of the "Wahrungsausschubes" already firmly planned. The latter is basically a banking system based on the colonial principle. Since Brazil’s financial crisis, discussions have been going on in Buenos Aires with a view to replacing the Argentine peso with the U.S. dollar, which would not only mean full control of money supply management by foreign creditors, but also that banknotes would be printed by the U.S. Federal Reserve (controlled by a handful of private U.S. banking institutions).
Other countries may want to follow the Argentine model, as they see replacing their national currency with the dollar as a way to avoid the financial crisis.
This "Dollarization process" will probably be initiated (according to the Washington consensus) by attacks of speculators who (waiting for negotiations concerning the exchange of these national currencies by the U.S. dollar) will markedly lower the value of the national currencies against the dollar
Crippling the neoliberal agenda
"Economic crimes against humanity"?…
Those in New York and Washington who are responsible for Brazil should not get away with it by pretending that they knew nothing… The financial authorities of the G7 nations and 14 other nations have helped finance the IMF-sponsored fraud (through the Bank of International Settlements). The governments were fully aware of the implications of the IMF loan agreement. They bear a heavy responsibility for the approval of a multi-billion dollar fraud that led to the brutal impoverishment of the Brazilian population.
While the international community is moving to dismantle the Washington Consensus and tame financial markets, there are indications that similar attacks by speculators with devastating economic and social consequences are being planned in other Latin American countries, in Asia and in the Middle East.
Michel Chodovsky Professor of Economics at the University of Ottawa, author of The Globalization of Poverty, Impacts of IMF and World Bank Reforms, Third Worlds Network, Penang and Zed Books, London 1997 (the book can be ordered at firstname.lastname@example.org can be ordered)
This article follows an earlier article by the author titled "The Brazilian Financial Scam" ("The Brazilian Financial Scam"), Third World Resurgence, November 1998, which was written before the crisis.