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Brazil Si, Argentina No
Subject Recession
Topic International Finance, Fiscal Policy
Key Words Recession, Exchange Rates, Economic Growth
News Story

At first news of Brazil's economic crisis, the U.S. position was to say no to a bailout. Argentina's economic crisis had begun earlier and the U.S. had closed the door to further assistance to that country. But the Bush Administration had had a change of heart and has proposed a $30 billion relief package for Brazil. There has been no reconsideration of our position towards Argentina.

One justification for assisting Brazil and not Argentina is Brazil's conduct. Brazil has reacted to its crisis by opening its markets to foreign trade, adapting tough monetary policy measures to fight inflation and, has invoked fiscal measures to improve its budget position. Brazil's banking system remains one of the strongest in Latin America. In contrast, Argentina had defaulted on its public debt, frozen bank accounts and refused to enact needed reform.

Another argument for aiding Brazil is self-interest. An economic collapse in Brazil would have a more significant impact on the U.S. than a collapse in Argentina. Brazil's economy is the 10th largest in the world, several times as big as Argentina's, and its external debt is twice as big. U.S. banks have much more exposure in Brazil, and U.S. manufacturers have made significant investments in Brazil.

There are also political reasons why a bailout for Brazil is beneficial to the U.S. Currently, the two leading candidates in Brazil's upcoming elections are leftists who have threatened to reverse Brazil's open-market policies and undo some of the economic reforms. The U.S. has structured the aid package in a way that may impact the election. Most of the assistance cannot be tapped until after the election and conditions of the loan oblige the government to continue current austerity measures. Both leftist candidates recognize the importance of the assistance and have recently suggested that, if elected, they will continue current austerity measures. The U.S. is also using the loan as an incentive for Brazil to join in talks aimed at forming a Latin-American free trade agreement.

Reaction to the proposed relief package has been positive. Brazil's stock markets and the value of its currency increased when the relief package was announced.

(Updated September 1, 2002)

Questions
1. The U.S. currently exports goods to and imports goods from Brazil. U.S. banks have loaned Brazil money. How would an economic collapse in Brazil affect imports and exports of goods and services? How would it impact capital flows between the two countries?
2.

One of the conditions of the bailout is that Brazil maintain a budget surplus equal to 3.75% of GDP in order to repay its debt. How can Brazil increase its budget surplus? What impact does this have on the economy?

3.

What are the benefits of Brazil's joining a Latin-American free trade agreement? Are there any reasons why Brazil would be reluctant to do so?

Source Edmund L. Andrews, "Why Brazil gets help and not Argentina," The International Herald Tribune, August 10-11, 2002.

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