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Foreign debts

Brazil has long been saddled with large foreign debts, and has been vulnerable to external crises throughout the last decade, but the stabilization of the currency and rapid growth of exports have significantly improved the future prospects.

 Brazil’s foreign debt became a matter of importance as from the second half of the seventies, provoking heated arguments about the prospects for economic growth over almost two decades. ----The net accumulation of the foreign debt (that is, after discounting the international reserves of the monetary authorities) is the result of the difference between the current account deficit of the balance of payments and capital in-flow into the Country, in the form of direct investment. After oil prices quadrupled in 1973, the accumulated current account deficits were the main factors behind Brazil’s foreign debt during the seventies.

As from 1975, the government of Ernesto Geisel (1974-1979) decided to take advantage of cheap and plentiful international liquidity, in parallel with the prospect of growth in international business in order to adapt the economy to the new international prices. This was done by means of adopting an ambitious investment programme to enable production growth without placing pressure on imports, replacing whatever was possible in the production of both basic raw materials and machinery and equipment. Between 1974 and 1979, an average growth rate of 6.8% was achieved, practically the historical mean (although below the 10% aimed at for the year), with an increase in the foreign debt from US$ 12.5 billion to US$ 46.9 billion in 1979.

Conditions favourable to the foreign indebtedness ceased to exist when the rise in US interest rates began to affect the international capital markets. This in turn led to a sharp rise in costs to service the debt at the same time as rendering export growth non-viable because of the world recession in 1981. With the Mexican moratorium in August 1982 which caused the disappearance of voluntary financing of the foreign debts of Latin American Countries, Brazilian expenditure with interest rates reached 47.1% of the revenue from exports. In the ten following years, financing the foreign debt ceased to be a market problem and instead became a matter of economic diplomacy.

The first attempt at long-term rescheduling was a failure, under the terms of the plan named after the US Treasury Secretary at the time, James Baker. It was only after March 1989, following an initiative by Baker’s successor, Nicholas Brady, that the crisis of the debt came to an end. The formula for the co-ordinated loan renewals based on negotiations involving multilateral institutions, committees representing private banks and government creditors was replaced by the idea of a menu of options providing both the opportunity for the withdrawal of the regretful creditors with loss of premium, with incentives for fully secured new loans. Under the aegis of the Brady Plan, Brazil only managed to exchange bonds to the value of US$ 46 billion of her foreign debt on 15 April, 1994, and without the support of a formal agreement with the IMF. Two and a half years of the "agreement on principles" had passed and almost twelve years since the Mexican moratorium.

At the time of the agreement, interest payments had already been reduced to 8.8% of export revenue and the gross debt of US$ 136 billion (US$ 119 billion after discounting reserves) was only 3.8 times the exports and no longer represented a limitation on Brazilian economic growth. The net foreign debt in the year 2000, non-financial segments of the public sector owed approximately $ 54 billion (in current dollars, that is far less than 1980 debt levels). This amount represents about 9.5% of GDP, which is one of the lowest ratios to be found in developing countries.

With prospects favourable for economic stabilisation, in 1994 Brazil entered into another cycle of foreign debt accumulation, in the wake of a notable increase in capital flow for the third world. Under the new conditions, private capital once again represents the most important source of financing current account deficits, which have risen as a natural consequence of the attractiveness of investments and the sluggishness with which domestic savings have recovered.

Because news regarding the management of the economy has not been good, Brazil’s economy in 2001 is somewhat vulnerable to the world’s shrinking economy and to the shaky private financing that is currently available, particularly since, unlike certain Asian countries such as Korea, we do not have sufficient international reserves to guarantee tranquility in every possible external scenario. However, despite the major turbulence from Argentina and the fallout of the terrorist attack on the United States, Brazil’s external position has been strengthened in today’s context of highly indebted countries. This is not only because Brazil has little short-term debt (only 12% of total debt), but also thanks to considerable progress in adjusting fiscal and foreign accounts, an effort which has been recognized in international forums.

Up to what point a strategy for growth can be supported in this new cycle of indebtedness is an issue that has been discussed in practically all international forums of economic debate, taking into account that the notable increase in capital flows crossing the frontiers during the nineties was also followed up by a sharp increase in their volatility. The speed with which the new capital flows change direction and opinion, an example of which took place in Mexico in December 1994, provides a challenge not only for international co-operation but also for the handling of monetary and exchange rate policies by Countries after the foreign debt crisis, and Brazil is no exception to the general rule.

Brazil is still the biggest debtor among developing nations with more than $400 billion of debt, but the leading international rating agencies have recently improved their assessments. Structural changes in Brazil's productive sector have served to increase the international competitiveness of the export sector.

Local interest rates in Brazilian Real are still among the highest in the world, which has contributed to a significant surge in the value of the Real against the US Dollar.

Economic growth of 4.9 percent in 2004 and 3.4 percent in the first half of 2005 has been led by a surge in exports to record highs. Exports almost doubled to $111.5 billion in the 12 months through September 2005 from $57.4 billion three years ago as demand from China and other countries soared for Brazilian products such as soybeans and steel.