Source:
IFIs Latin American Monitor
Fri Mar 14 2008
On February 25 the Central Bank of Brazil announced that the country had reached the status of "net foreign creditor" in January, closing at nearly 7 billion dollars. This means that foreign currency assets – basically made up of international reserves – outpaced the country’s foreign liabilities. The government of Lula celebrates the news as a “historical” event. However, the Bank itself acknowledges that the institution suffered considerable losses as a result of the real’s appreciation. The government’s arguments fail to convince social organizations which maintain that behind the increase of international reserves there is a spiralling internal debt.
Before an audience of businesspeople at the Planalto Palace, president Lula stated that “good luck helped the country to reach a growth considered nowadays as vigorous and to become a net foreign creditor”. But according to Lula, “luck only helps those who work hard”. According to the External Sustainability Indicators of the Central Bank of Brazil, the results in the foreign sector show “an unquestionable strengthening of the country's external position”. This represents an “unprecedented fact”, that “tends to mitigate, without totally offsetting, the impact of adverse external events”.
In Central Bank figures, the total external debt stood at 196.2 billion dollars in January, while assets amounted to 203.19 billion dollars – made up of 187.5 billion in reserves, 2.81 billion in foreign credits and 12.86 billion in commercial bank assets.
By end-2007 reserves amounted to 180.3 billion dollars, which accounts for a 110% growth with respect to the previous year. This expansion was mainly the result of US dollar purchases by the Central Bank throughout 2007, the primary surplus (income minus expenses, excluding interest payments), GDP growth, and the adjustment of the currency basket making up the external debt. Between 2003 and 2007, dollar purchases amounted to 141.3 billion, accounting 55.6% of such total for purchases made in 2007.
The total external debt, according to January estimates, stood at 196.2 billion dollars, which accounts for a 1.5 billion reduction with respect to the estimate for the previous month. Of such total, 158.1 billion account for the medium- and long-term debt and 38.1 billion to the short-term debt. The progression of such figures is translated into an increase of the medium- and long-term debt, and a decrease in the short-term debt.
The net public sector external debt/GDP ratio was also favorable to the government. In January, such ratio showed a 0.7% decrease with respect to the previous month, falling from 42.8% to 42.1%. This indicates that the debt/GDP ratio has reached the lowest level since 1998 (38.9%), while the highest level amounted to 52.4% in 2003.
Nevertheless, the Bank itself informed that the institution lost approximately 7 billion dollars (R$ 13,167 bilhões) in the first semester of 2006. The reason was the appreciation of the real. The Brazilian currency ended up being 8.66% more expensive than the average of foreign currencies. The institution explains this phenomenon by neutralizing the negative impact of the exchange rate variation on the balance of the Bank and its positive impact on the external debt.
The argument put forth by the government fails to convince those social organizations monitoring the economic policy and the evolution of public debt. There follow two excerpts of articles that critically analyze the government’s announcement.
Public Debt: the truth not told by the government
by Rodrigo Avila (Jubilee South/Brasil) - (See full article in Portuguese language)
What lies behind this unrestrained hoarding of international reserves? A true feast for domestic and foreign speculators who bring their dollars in bulk to purchase “internal” debt bonds, in search of the world’s highest interest rates. This has boosted the internal debt, which registered a 40% increase in just 2 years (from December 2005 to December 2007).
In this way, investors contribute to the devaluation of the US dollar vis-à-vis the Brazilian currency. Banks and local companies also take advantage of this, by taking foreign loans (that are cheaper due to low interest rates) in order to lend money to the Brazilian government, through the purchase of internal debt securities, thus getting a fortune due to Brazil’s extremely high interest rates. There is no limit whatsoever for these operations; the Central Bank buys these dollars and offers internal debt securities according to foreign currency flows. When investors are given their profits in Brazilian reais, they can exchange them for a larger amount of dollars – once the Brazilian currency has appreciated – and thus fulfill their commitments overseas, making extra profits.
In 2007, the real appreciated 20% vis-à-vis the US dollar. Therefore, the foreign investor that brought dollars to invest in Brazilian internal debt in early 2007 earned 13% by way of interest during the year and over 20% when exchanging profits into US dollars. So, in 2007, foreigners profited from a real interest rate (in US dollars) of over 30% a year!
On the other hand, when buying the foreign currency brought by speculators, the Central Bank ends up keeping the dollar currency that is being devaluated. All this results in a huge damage to the Central Bank, which amounted to 58.5 billion reais just from January to October 2007. This was to the detriment of the National Treasury, and doubled the total of federal health expenses during the same period. On the other hand, bankers benefiting from this move do not stop beating records of gains.
Therefore, this so-called historical landmark disseminated by the government, actually conceals a recycling of the old external debt plundering mechanism, under a new mask: “internal” indebtedness. This is a highly profitable mechanism for foreign investors, given the fact that they end up being immune to the devaluation of the US currency, while receiving their gains and interest in a currency that is becoming stronger vis-à-vis the dollar.
Furthermore, when the government argues that it has the resources to pay the total external debt it makes a statement in support of payment of an illegitimate debt, which has already been paid several times with the sweat and blood of its people, since the 1980s when the United States decided to sharply increase - in a unilateral and illegitimate way – the interest rates that have an incidence on the external debt, thus driving the Third World into recession and unemployment.
In 2007, the federal government spent 237 billion reais in internal and external debt interest and amortizations, while it only spent 40 billion in health, 20 billion in education and 3.5 billion in agrarian reform. And the government still has the nerve to assert that the debt is not a problem!
There is no way out to indebtedness but a comprehensive and strong audit that would quantize the number of times we already paid this debt and determine at what social and environmental cost.(...)
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