THE FINANCIAL CRISIS IN BRAZIL

Created: 7/21/1959

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national intelligence estimate number

the financial crisis in brazil

Submitted bv the DIRECTOR OP CENTRAL INTELLIGENCE The following Intelligence organization! participated in the preparation of this estimate The Central Intelligence Agency and the Intelligence organizations of the Departments of State, the Army, the Navy, the Air Force, and The Joint Staff.

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THE FINANCIAL CRISIS IN BRAZIL

THE PROBLEM

To estimate the political and economic consequences of the Brazilian financial crisis, over the next few months.

THE ESTIMATE

THE CURRENT SITUATION

Brazil isinancial crisis. During the next five months. In addition to normalpayments for imports. Brazil is obligated to0 million In principal and Interest on its foreign debt, which totalsOf this total, about three-fifths iscommercials of mid-July, Brazil's current dollar exchange availabilities were down toillion: its uncommitted gold reserve wasoreover, foreign exchange income during the rest9 will be low. since the bulk of payments for coffee exports will not be received until after the first of the year. Finally. Brazil has stretched its credit close to the limit. In these circumstances, unless Brazil obtains US assistanceoratorium on its debt payments, it will be forced to

The present financial crisis in Brazilepetition of similar crises in the postwarA primary source of these difficulties has been Brazil's effort toigh rate of economic development in the face of de-

A portion ol this reserve must be considerede potentially committed In that Brazil has agreed to increase Its contribution to theMonetary Fund and to provide lis share of the capital ot the newly-createdDevelopment Bank.

dining foreignGNPat an average annual rate of about six percent in the6ndate of about four percent5owever, the price of coffee began to fall, and with it the value of Brazilian exports. To maintain the high rate of imports necessary forBrazil has drawn down its foreignreserves and has borrowed large amounts on short and medium termIts financial position has beenfurther by the failure of successivegovernments to control inflation. Prices have nearly trebledajor causes of the inflation have been large-scale deficit spending by the government*ontinuing rapid expansion ofthe Brazilian money supply almost tripled3 to the endhere Is little hope for improvement in this situation, at least throughbalance ofdeficit will run at0 million per annum9ateto thathe bill for servicing foreign debts will continue toajor cause of this deficit;0 it will be0 million.

The internal debt of the federaloughly estimated toillion0 million at the current free rate ol exchange!.

3imilar situation. Brazil asked the US (or balance of payments assistance. The US granted this request, but only after Brazil had agreed totabilizationacceptable to the InternationalFundhe US hasimilar course of action with respect to other Latin American countries, includingChile. Peru, and Bolivia. However,of domestic political pressures.Kubitschek was unwilling fully tothe stabilization program. Inof this year Brazil again Indicated that it required US assistance inalance of payments deficit of0 million, and again Brazil was told first totabilization program with the IMF.

At the present time negotiations between the IMF and Brazil have been broken off,because President Kubitschek isto reduce subsidies on certainimports, especially petroleum, petroleum products, and wheat He argues that such action would substantially increase the cost of living, and that this would causeunrest and internal strife. He iscertainly apprehensive of tho effect these developments might have on his party's prospects In the0 elections.

The resolution of the disagreementPresident Kubitschek and the IMF is made extremely difficult becauseasic difference in philosophy. He is committed to rapid economic development, as well as to the building of the new capital city, Brasilia. In view of the shortage of domestic capital, most of the leaders in his government believe such development can be accomplished only by large-scale deficit financing through thebudget and by an easy credit policy.

6 The Brazilian Oovemment has now asked for US assistance in the absence of anwith the IMF. President Kubitschek almost certainly is counting on the USsomewhat ond being willing either to put enough pressure on the IMF to cause It to modify its position or. In the end, coming to Brazil's assistance without an IMFHe probably believes that the US.regarding the security of USrights and US investments in Brazil0ill act as he desires,ontinuation of the impasse open the floodgates of ultranationalism and anti-Americanism. He appears to believe these considerations will outweigh US reluctance to make an exception to the IMF stabilization program approach.

the following paragraphs weconsequences of the Brazilianover the next few months. If.o meet IMF conditions andstabilization assistance fromrefuses lo meet the IMFthe US agrees to reschedule debtand (c) Brazil agrees to meet theand receives additionalfrom the US

II. CONSEQUENCES OVER THE NEXT FEW MONTHS

Assumption A: Brazil refuses to meet the IMF requirement and receives no stabilization assistance from the US.

Prospects. Even underBrazil could probablyfor the next few months. Itillion credit fromReserve Bank of New York, usingits gold reserve as collateral, but onday term. It cannegotiate the rescheduling of some ofdebts. Moreover, Brazil mightto maintain roughly the current leveltwo largest and most costly imports,and wheat. Foreign petroleumwould probably be willing tocredits in order lo maintainof the Brazilian market. Despiteposition on the stabilization problem.might obtain additionalheatFurthermore, while European(West Germany. France) havethat they are unwilling todebt problem until Brazil hasagreement with the IMF, It Issome Eurojwan credits will be obtained

these measures would onlyBrazil would have to cut Itssharply, an action which wouldaltect many Important projectswouldoost to alreadypressures Moreover, beforeof the year Brazil would almostto default on some of Its foreign debts.

Prospects, In the shortcould probably avoid much offor the deteriorating economicby blaming everything on the US charge that the US. under cover ofstabilization agreement, had soughtin Brazil's internal affairs, andassert that he had acted tonational sovereignty. Theof the deteriorating economicthe campaign for0 elections,already begun, would be to Increaseshrillness of the anti-Americanthe number of politicians makingthe end of the year, the economichave so deteriorated that seriouswould be likely. It isthe military could and would sustainIn theselections. However, if they camethat order could not bea change of administration, theasight call upon theresign andaretaker regimethe elections.

Attitude Toward the US. Itthat, if Kubitschek concludedUS would not relent on Its conditionshe would come to terms beforehad deteriorated too far. Hecourse, seek to present any agreementpolitical success rather than as aIt is more likely that he wouldhis position anderies ofactions. Including perhapsof remittances by US concernsexpropriation of some US holdings.even come to abrogate USSuch actions are amongo-called 'disaster plan"apparently been formulated by certainmore radical advisors. Incircumstances, they would probably have wide popular support. But at the same time there would probably be many elements of the business community, the military, and the government that would opposeseriously Brazil's relations with the US We believe it unlikely that any Braziliancould long sustain an anti-US policy like that of Argentina under Peron.

Brazil's Attitude Toward the Soviet Union. Kubitschek would be under heavy pressure to seek assistance from the Soviet Union. At the same time, there would be opposition to such action by conservative groups, especially by the military Nevertheless, if there were no amelioration of economic conditions within the year and if the Soviet Unionsubstantial assistance, it is probable that Brazil would accept. While Brazil's leaders are fully aware of the importance of their economic relations with the US, in the assumed situation they would probably feel that, even though the US would be displeased, they had no choice but to accept Soviethey would also believe that such action would bring pressure on the US to reconsider its position.

The Attitudes of Other Latin American Countries. Latin American opinion makes no distinction between the US and the IMF. There would probably be widespread popular sympathy for Brazil in Its stand against "dollarnitial comment In those countries which have accepted IMF stabilization requirements has been to the effect that Kubitschek's rejection of such terms has proved that their governments need not have surrendered to IMF dictation. On the other hand, the governments which have obtained US assistance by accepting IMF stabilization requirements must, in self.justl-fication. support the US position and. indeed, insist that Brazil be made to comply with the same requirements which they have met at considerable political cost to themselves.

Soviet twmwf could not do much to eat* Brazil's current eruu unless the Sonet Union were willing- to grant tome balance o( payment credit* or toajor porUon of Biull's petroluum requirementsredit basis.

Popular understanding and acceptance of this point of view would tend to increase ifconditions in the cooperating countries actually improve while those in BrazilNevertheless, nationalistic and anti-US extremists throughout Latin America,those under Communist influence or control, would continue to denounce the L'S for intervention in the internal affairs of Brazil through dollar diplomacy and to call for united Latin American support for the Brazilian position.

Assumption B: Brazil refuses to meet IMF requirements, but the US agreesreschedule debt repayment.

Economic Prospects. Under theseBrazil could probably limp through the nextonths. It would probably avoid debt default, but, unless Kubitschek tookon his own further to reduce Imports and to expand exports, Brazil at the end0 would almost certainly be facedrisis similar to the present one. Internally, Inflationary pressure would almost certainly continue and the price of bread andwouldvery thinghas sought to avoid In refusing to accept IMF conditions.

Political Prospects. Kubitschek would be able to squeeze some favorable publicity out of what he would claim touccessfulof Brazilian sovereignty. However,he takes ma]or action towarda greater degree of internal economicourse which is unlikely, he and his party will become increasinglyto charges of economicIt is possible that this couldecisive factor in0 elections.

Effect on Brazil's Attitude Toward the US and the Soviet Union; on the Attitude of Other Latin American Countries.relations would probably not beaffected in the short run; however, as the economic difficulties continued there would probably be an increase in Brazilian irritation with the US because of iLs failure to be more generous. While it is likely that

Brazil would at any time accept from theUnion assistance which Brazil considered useful, under the assumed conditions Brazil would almost certainly scrutinize possible Soviet offers more closely than it would under Assumption A. In most otherof Latin America, there would be ato admire the success of the Brazilianagainst the US effort to imposeconditions. However, in the countries now operating under IMF arrangements the governments could probably defend their own actions by pointing out how much morethey obtained than did Kubitschek.

Assumption C: Brazil makes an agreement with the IMF and receives assistance from the US.

Economic Prospects. There would be some Improvement In Brazil's economicIf the changes within the Brazilian economy are for the most part graduallythe reaction to any austerity measures would probably be miLigated. Kubitschek would probably not press vigorously measures designed to curtail credit, to reduce deficit financing, or to act substantially to raise prices of basic items such as bread, petroleum products, orof which,of subsidy arrangement, are majoron the national budget. Generally speaking, we believe it likely that under the assumed conditions Brazil would maintainate of growth of GNP of about four percent. Inflation would have been curtailed somewhat, and exports might show some Improvement. But Brazil would almost certainly still require externalIncluding balance of payments support,

Political Prospects. Regardless of the facts, the Brazilian Government would believe it essential to present the IMF agreementictory for Kubitschek. Provided no serious economic crisis developed before the elections. Kubitschek's party would probablyet gain from an agreement with the Fund and receipt of US aid. However, if economic conditions should deteriorate, he would at-

tempt to place the full blame on "Inadequate" assistance from the IMF and the US.

ffect on Brazil's Attitude Toteard the US and the Soviet Union. Brazil's relations with the US would continue to be basically friendly, although the charge that conditions had been Imposed by the US would add fuel to the anti-American campaign, which is already strong and will Increase during the election period. While Brazil would be under less pressure to accept Soviet offers of assistance, it would probably still accept at any time an offer which it considered favorable

ffect on the Attitude of Other Latin American Countries. If Brazil should reach an agreement with the IMF, the result would be to eliminate Brazilallying point in Latin America for agitation against US-IMF stabilization programs. It would also Lend to reduce criticism in other Latin American countries of their own stabilization programs However, should the other governments come to believe Brazil hadetter deal lhan they had, some would be likely to press for an easing ol the conditions of their own

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