Commentary: Brazil Doesn't Need A Bailout. It Needs Leadership

Encouraged by pledges of support for Brazil from President Bill Clinton and the Group of Seven, Sao Paulo's battered stock market soared in mid-September by a near-record 45% in just three days. The rush of dollars out of the country slowed to $350 million on Sept. 15, down from as much as $2.2 billion a day in the previous week. Brokers and analysts chirped cliches about the end of Brazil's crisis, touched off by financial tumult in Russia and Asia in late July.

Whoa, there. The $26 billion line of credits to Latin America that the G-7 countries, the International Monetary Fund, and other international lenders may assemble would be only a reprieve. Brazil, the country at the vortex of Latin America's financial storm, has to take drastic measures--with or without an agreement with the IMF--to curb its runaway deficit spending and its $276 billion domestic debt. Otherwise, capital flight will resume--and upset the rest of Latin America again.

What Brazilian President Fernando Henrique Cardoso and his advisers clearly hope is that the prospect of multilateral aid to Latin America will calm the turbulence and give Brazil a respite. But with an economy twice the size of Russia's, Brazil is too big to be bailed out by the IMF or G-7. Brazil must save itself.

The place to begin is at the top. Cardoso, running for reelection Oct. 4, has to start acting less like an insecure candidate and more like a decisive leader. Although he has a wide lead in polls, he delayed, apparently for fear of alienating voters, in boosting interest rates to damp speculation against Brazil's currency. Eventually, he hiked the rate on Sept. 10 to a draconian 49.75%. Faster action could have slowed the shrinking of reserves to $50 billion from $70 billion in July.

Now, to win back the confidence of the markets, Cardoso needs to push through hefty spending cuts to curb the $60 billion budget deficit, equal to nearly 8% of gross domestic product. Proposals on Sept. 8 to trim $3.4 billion from this year's budget disappointed the markets as too timid. And to show that he's committed to tougher measures, he should announce them himself, rather than releasing the painful news through subordinates.

Cardoso should also have more faith in voters. While the steep interest rates and spending cuts may tip the country into recession, Brazilians trust Cardoso as the leader who ended frightful hyperinflation. "He's the stabilizer," says Ernest W. Brown, Latin America economist for Morgan Stanley Dean Witter in New York. "They're not voting for him because he's the guy who's going to bring growth."

PRICKLY. It's crucial for Cardoso to use the campaign to convince voters of the urgency of slashing bloated public payrolls and revamping the social security and tax systems. These moves have been bogged down in Congress. Now, after a financial near-panic, is the right time to rally popular pressure on Congress to put the economy on a sound footing. Last fall, it seemed that Cardoso would do just that after a capital flight triggered by Asia's mess. But when money began returning, Cardoso let the agenda slip onto the back burner.

Finally, Cardoso should shed Brazil's prickly nationalistic reluctance to agree to any IMF terms in return for loans. Since the 1980s debt crunch, Brazil has acted coolly toward the IMF, at least in public, believing that posture plays well with voters. But IMF credits and visible support would further allay devaluation fears. Cardoso has brought Brazil a long way from inflationary chaos, and he is capable of shaping public opinion. With more decisive leadership, a stronger Brazil can emerge from the crisis.

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