This article appears in the August 9, 2002 issue of
Executive Intelligence Review.
Financial
Armaggedon Is Unfolding in South Americaby Gretchen
Small
The
decision was made on July 23-24 by the U.S. Federal Reserve, reliable
European sources report, that any and all measures would be taken to keep
the U.S. stock markets from melting down before the November 2002 mid-term
elections. At stake was far more than the Republican Party's election
prospects, or U.S. stocks. With J.P. Morgan-Chase executives forced to
call a teleconference July 24 to dispel swelling rumors that they were
facing insolvency, urgent action was required. The rumors of insolvency
also included Citigroup, second only to J.P. Morgan-Chase as the top
holder of derivatives in the United States. Were even one big U.S. bank to
go under, it would trigger "financial Armaggedon" for the already terminal
global system.
The
"whatever necessary" decision led to the greatest stock market
intervention ever by the U.S. Federal Reserve, supported by other G-7
central banks. It succeeded in halting the meltdown ... at least for a
week.
But,
while the financial establishment was riveted on the chaos on Wall Street,
another part of their global speculative bubble was bursting: Brazil, and
with it, the entire South American financial system.
On July
29, the Brazilian currency, the real, plummetted by nearly 5.5% in a
single day, after losing 5% in value the prior week. The next day,
Associated Press asked worriedly, "Is Brazil heading for an
Argentine-style meltdown?" as the Brazilian currency lost another 4.6%,
and its country risk soared to 23.45%. This is an index (set, ironically
enough, by the bankrupt J.P. Morgan-Chase) used to indicate risk of
default. The only higher country-risk ratings in the world, are those of
Argentina—which defaulted on $95 billion in debt in late 2001—and
neighboring Uruguay, which at the end of July had to declare a bank
holiday, as it careened toward bankruptcy as well.
Officials from Brazil's Central Bank and Finance Ministry boarded
planes to Washington, for emergency discussions with the International
Monetary Fund (IMF), to try to scare up sufficient funds to forestall
national bankruptcy—an unlikely prospect.
Most To Lose
in U.S., Brazil
How big
is the Brazilian foreign debt bubble? $500 billion big. That is largest
foreign debt in the world. It is dwarfed, however, by the United States'
$32 trillion in combined public and private debt. This U.S. debt, along
with the world derivatives bubble, is by far and away the world's greatest
financial bomb.
The
Brazil developments caused panic on Wall Street. Top executives of the
already-bankrupt Citigroup announced on Aug. 1 that they would now meet
regularly to calculate how to "mitigate losses" in Brazil. Citigroup lost
$2.2 billion in Argentina, but had, as of March 2002, nearly $13 billion
to lose in Brazil. European exposure is even greater than American in
Brazil, with Spanish interests guaranteed to go down when Brazil goes,
because of enormous exposures in energy, telecommunications, and above
all, banking.
On July
30, Uruguay, the "Switzerland of Ibero-America" whose economy largely
revolves around its role as an international offshore banking center, was
forced to declare a bank holiday, its first in 70 years. The expected next
step: an Argentine-style bank deposit freeze.
Two
countries in South America—Argentina and Uruguay—now have no banking
system to speak of. Paraguay's system could blow tomorrow; Bolivia just
suffered a damaging run on its banks. The bonds of every country in
Ibero-America collapsed in the final week of July, as did many currencies,
including Mexico's peso. No fewer than seven Ibero-American countries are
now lining up, hat in hand, for urgent talks with the IMF.
Fools
are running around calling this "contagion." It is, rather, a systemic
blowout. Speaking on June 13 in São Paulo, Brazil, at a luncheon hosted by
that city's Commercial Association, Lyndon LaRouche prophetically warned
Brazilians of what has since happened, the explosion of their system under
them. "Governments must act to put the system into bankruptcy
reorganization. If you do not do it, you have the worst possible result,"
he told them. "Brazil, like every other nation on this planet, including
Japan, is the victim of an Anglo-American dictate to try to perpetuate
that bankrupt system. If we continue, this will blow up, and this could
probably happen in the next two to three months. What is happening in
Argentina is a warning."
Uruguay Goes
Down
In
collapse, Uruguay, though small both geographically and financially, poses
a political problem for the IMF and Wall Street. This was their "success
story" in the region, matched only by Chile. In a statement proving
ironically prophetic, the State Department's pre-trip background briefing
on Assistant Secretary of State Otto Reich's July 7-12 trip to South
America, declared that, in Reich's view, Uruguay "represents what we hope
the hemisphere will become."
At the
beginning of 2002, Uruguay had a minimal country-risk rating of just over
2%; today it stands at 31%, rated second worldwide only to Argentina. Its
bonds were rated investment grade as late as May 2002; today, they are six
levels below investment grade.
Over
the course of 2002, bank deposits dropped by 40%. On June 20, Uruguay
floated its currency for the first time in 20 years. Since then, its peso
has dropped almost 40% against the dollar, and the bleeding of bank
deposits, and consequently central bank foreign reserves, has escalated.
The nation's reserves dropped by over 70% from the beginning of the year,
27% in the first 16 days of July alone. The $500 million loan disbursed by
the IMF in mid-June was gone within two weeks; $100 million a day left the
banking system over the course of July; and by July 31, reserves were
reported at $665 million.
The
government suspended operation at two banks on July 30, and declared a
general bank holiday, first for a day, then for the rest of the week.
Depositors are permitted only to withdraw a limited amount of pesos, and
no dollars, from ATM machines.
The
same IMF and U.S. Treasury which have strangled Argentina of credit,
quickly stepped in to bail out bank haven Uruguay. The government has
already secured an increase in the IMF bailout arranged only in June, and
is to receive an emergency disbursement of $1.5 billion on Aug. 5,
followed (they say) by another $2.1 billion to be disbursed shortly
thereafter. The total bailout package under way for Uruguay, $4.7 billion,
equals one-quarter of its GDP.
The Bicycle
Has Stopped
There
has not been a similar massive run on the banks in Brazil yet, but that is
coming. On July 29, as the real plummetted, rumors began to circulate that
Brazil might declare a bank holiday. According to the daily Folha de
São Paulo of July 30, an extreme scarcity of dollars relative to
panicked buying, created a $2-3 billion "hole" in Brazilian bank
accounting on July 29, as the banks tried to cover the demands of their
clients for dollars to pay their debts.
In the
1980s, the speculative financial pyramids built around the national debts
in Ibero-America, were dubbed "the bicycle." A bicycle remains upright, as
long as you keep pedaling. So, too, in the debt game, debts were paid as
they came due, by taking on new, bigger debts. The debt piled up, but as
long as the money kept coming in, the speculative game stayed
"upright."
Brazil's late July blowout is occurring because the bicyclist has
stopped pedaling for Brazil. Foreign direct investment (FDI) has dried up,
as global financial capital evaporates in the global crisis, or is sucked
into the United States to keep the stock market bubble from exploding. In
recent years, FDI was one of the principal mechanisms by which Brazil
secured a sufficient inflow of capital to provide the liquidity to cover
debt payments. Privatizations have ground to a near-halt, as the U.S.
energy companies go under, which were expected to buy what Brazil hoped to
sell this year.
The
Brazilian private sector, which owes over $150 billion in foreign debt,
has found that it can no longer roll over its loans. Between January and
May 2002, only 58% of private foreign obligations were rolled over,
whereas 96.5% were renewed in 2001. In June, the figure dropped to 22%,
which means that Brazilian companies have only the option of raising the
cash to pay off three-quarters of their loans—or default.
This is
no small thing. The estimate is that Brazilian private firms have $10.6
billion in foreign debts coming due by Dec. 31. And, because every
devaluation of Brazil's real makes paying off dollar debts more expensive,
by late July companies began panic-buying of dollars, to try to pre-pay
debts before the currency dropped lower. The panic accelerated the
devaluation, as the dollar's value soared because of the
scarcity.
Worse,
Brazil has found that its trade credits are being cut off, usually
the last thing to go in a crisis. Since March, international credit lines
available to Brazil for imports and exports, have dropped by almost half,
from $10.8 billion, to $5.7 billion.
The
even more explosive charge lying under the Brazil debt bubble, however, is
the government's domestic debt—the 1 trillion reals worth of government
bonds, of which around 150 billion come due by the end of 2002. This
government debt has quintupled since 1994, when President Fernando
Henrique Cardoso came into office. It has been paid by the same "bicycle"
principle as the private sector, but as investors became more nervous
about the mounting debt, the financial team running the show enticed
investors to keep "pedaling," by offering dollar-indexed domestic bonds,
and floating interest-rate bonds.
The
"solution" of yesterday's crisis, has become the nightmare of today's.
Some 40% of Brazil's trillion-dollar domestic public debt is now
dollarized. That means that every time the real devalues, Brazil's debt
increases. By Bloomberg News Service's calculation, every percentage point
devaluation increases Brazil's government debt by $1.4 billion. To see the
absurdity of the situation, consider that on July 29 alone, the run on the
real due to panic about Brazil's ability to pay its debt, increased
Brazil's debt by a whopping $7.56 billion, without the country receiving a
single loan.
Capital
Controls Now!
In this
situation, the fixation on getting another $10-20 billion in new money
from the IMF is ludicrous. It cannot solve the problem, even temporarily.
And, given the IMF's conditionality, that all the candidates in the
October 2002 Presidential race sign on to any agreement the Cardoso
government might reach with the IMF, a new bailout is not likely to come
quickly, if at all.
Brazil's debt is unpayable, and everyone in the know, knows this,
and is planning accordingly. The "big money" is pulling out now, only
hoping that the IMF kicks in enough capital to ensure that foreign looters
can get all of their money out before Brazil goes bust, and its banking
system implodes as in Argentina and Uruguay. The issue is, will Brazil let
the game continue until it is stripped of everything but its debts, and
then default like Argentina? Or, will it heed LaRouche, and stop the
bleeding now?
Brazilian Central Bank President Arminio Fraga, mega-speculator
George Soros' old employee, assured investors on a teleconference arranged
by UBS Warburg on Aug. 2, that he ruled out any imposition of capital
controls to defend the currency. But that is precisely what needs to be
done, immediately, as the Ibero-American Solidarity Movement (MSIA),
LaRouche's movement in Brazil, emphasized in a statement issued July 30.
Brazil must break with the "rules of the game" of the failed international
financial system. It must dump Fraga; impose capital controls, as Malaysia
did in 1998; and use its considerable weight in the global arena to
initiate an international movement for convening a "New Bretton Woods
Conference," to discuss the reorganization of the world financial system.
This was proposed in numerous international forums since 1997 by LaRouche,
and since echoed by others. That, combined with concrete measures to
promote Ibero-American integration, is Brazil's only option for
survival.
As
LaRouche told Brazilians from São Paulo, the issue is: "Can we survive?
Can civilization survive? Can Brazil survive? Isn't that the question
here? ... You see what is happening to Argentina? ... And where can you
find the leaders who will avoid denial? To look the ugly truth in the eye,
to look the dangerous truth in the eye, and say, 'I'm going to do whatever
is necessary to save this nation, and civilization, this nation being my
immediate responsibility.' "
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