Brazil Dazzles Investors, Frazzles Consumers

The Brazilian government seems to have allayed the fears of international creditors that it would be unable to service its massive $55 billion foreign debt-but only at the expense of hardship for most of the nation's people.

The positive reaction Brazil has received from Euromarket creditors stems perhaps in part from its new economic policies. Planning Minister Antonio Delfim Netto late last year cut government subsidies and relaxed price controls on basic commodities, rents, and credit, thus shifting more of the responsibility for basic consumer necessities from the government to the people. At the same time, controls on foreign borrowing by private domestic banks have been loosened under a provision known as Resolution 63. aimed at enlarging domestic sources of investment capital. This enables Brazilian banks to back up cruzeiro loans with foreign currencies, thus dramatically expanding the nation's money supply and further fueling inflation.

The program has succeeded in substantially reducing government spending for food and other import subsidies, and correspondingly improving the prognosis for Brazil's continued ability to meet debt service payments. Also. Resolution 63 allows creditors to earn interest in Brazil at rates of as much as 2'/, percent over the London Interbank Offered Rate (Libor). International lenders have responded enthusiastically.

During the first three months of 1981, foreign borrowing was more than $4.7 billion-many times the figure for the same period a year earlier, when credit terms and interest rates were restricted by the government. The electricity corporation Electrobras, minerals firm Compania Vale do Rio Doce, nuclear energy utility Nuclebras, and National Development Bank have all planned, or taken out, multi-qiillion-dollar loans on foreign capital markets already this year.

An informal International Monetary Fund delegaton invited to Brazil in February for a briefing on the meaning of the new policies also apparently came away impressed; many of the measures included in Delfim's package are similar to what the IMF was known to have been advocating to help "stabilize" Brazil's economy. The Fund may respond to Delfim's initiatives with a large-scale loan to "support" the new economic program, should the country request such assistance.

But for the vast majority of Brazil's 120 million people, the new economic package means inflation which may approach 200 percent this year, and skyrocketing costs for consumer goods, both domestic and imported. Financial speculation brought on by the booming inflation and freely-rising interest rates is also expected to divert much of the newly-available money from productive investment into short-term "open market" financial transactions -thus short-circuiting Delfim's optimistic assumption that Brazil will be able to balance its 1981 budget without drawing on its $6.9 billion in reserves.

Commented the weekly newspaper Movimento, "Delfim's proposal for directing internal savings into productive projects and activities could end up in an extremely violent financial dance, with interest attaining absurd levels, money circulating rapidly in the economy, and inflation reaching the clouds ... (the government) has opted for scalping the people in the name of national salvation."