Created: 12/4/1962

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SUBJECT: Brazil's Balance of Payments Crisis

Brazil's financial crisis hasagnitude vhlch can probably be dealt vith only by anconsortium including the InternationalFund.

The IMF, however, vlll probablytabilization program so rigorous as to be unacceptable to Goulart. Unless the IMF agrees to mere token stabilization, vbich appears improbable, Goulart vould probably refuse its terms and seek to make thecapegoat for the ensuing economic collapse. This vould commit him finally to the radical left, leaving Brazil the alternatives of political evola-tion in Castro's footsteps, or intervention by the military to prevent it.

Brazil now Is moving rapidly toward financial chaos. Byrazil is expected to have excbausted Its gold and foreign exchange reserves and to have commercial arrears of more. 3 Brazil faces an0 million deficit in Its balance of payments, with no financing in sight for at0 million of It. The3 deficit0 million due in principal and Interest on foreign borroving, and an expected trade and commercial doficlt0 million. Exports in recent years have rangedillion4 billion, but imports have exceeded exports In value0 million. (An equivalent deficit for the United States, based on percentage3 exports, vouldillion.)

Probable offsets Includeheat,disbursements under US and other loansto Brazil, and some new foreignoffsets may0 million, and mayby0 million in bankand short term borroving from foreignBrazil. Even In this event, there voulddeficit0 million for vhlch no financing


The size of Brazil's financial deficit is such that tbe United States alone probably cannot provide tbe required amount,onsortiummajor Western European countries, Japan, and the International Monetary Fund appears necessary. European countries would probably not participate withoutF, however, and the IMF would undoubtedly insistrazilian economic stabilization program which Brazil would consider harsh and politically impractical.

Brazil has In previous years wade commitments for future action on economic stabilization programs but has failed to fulfill these commitments. For this reason, tbe IMF is likely to require action as well as commitments before consentingew financial aid program for Brazil.

esult in part of US representations to Brazil, the Brazilian Congress onovember completed actionax reform bill which couldirst step toward economic reform. Press reports lndicato, however, that the new budget passed onovember provides for expenditures equal5 billion and receipts of onlyillion. Brazil's willingness to undertake an economic stabilization program satisfactory to the IMF appears doubtful at best.

Without emergency US help, or tbe large-scale debt postponement and important new financing which could result only from an IMF-approved plan, Brazil will probably have to default on its externalin the next few months. Prior to default, Brazil is likely to goeriod of supply breakdowns and shortages severely disrupting the economy and accelerating inflation. (The cost-of-living increase2 la expected to come to aboutercent in tbe cities of Rio de Janeiro and Sao Paulo, and substantially more in tbe cities of the northeast. Brazil does not compilefigures.)

inancial crisis woulderious impact on the entire population, and President Goulart would almost inevitably seek to shift blame from himself to the United States. In this he would have Communist and leftist ultra-national1st support.

Tho likely result would be the final commitment of Goulart to tbe radical left, an Intensification of antl-Amerlcan sentiment and tbe polarization of domestic political forces. Goulart recentlyto tbe US ambassador that be believes Brazil "has an alternative" to US aid on US terms. He said he might have toecent Soviet offer of project assistance.

If Goulart, impelled by tbe financial crisis, were to followath to the left. Intervention by the Brazilian military would probably be the chief alternativeolitical evolution along the lines of Cuba under Goulart or some successor.

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