IBDE

By Charles de Chassiron, Former British Ambassador, IBDE Advisory Board Member

EXCHANGE: The Magazine for International Business and Diplomacy     No. 3 March 2011   

CRISIS MEETINGS in Western capitals, gnawing concerns about the stability of the world economic system, alarm about the future of huge international banks beset by bad debts – no, not the world of 2008/9, or of 2010/11, but that of 1982/3, in the wake of the massive foreign debt crisis in Latin America, and particularly in Brazil, the first to threaten the stability of the world’s entire financial system. I was an eyewitness to all this, after I was posted as a young diplomat to the British Embassy in Brasilia in late 1982. That foreign debt crisis of the mid-80s dominated my work as Economic and Commercial Secretary up to 1985, and then as Head of the Foreign Office’s South American Department, for most of the rest of the decade.

In the end the crisis passed, and the world’s financial structures survived - but it is an experience I have thought about once again over the last year or two, as the global financial system has once again been shaken to its foundations, and as the euro has passed through its current and increasing stresses. What parallels are there?

The Brazil to which I moved in that autumn of 1982 was in some ways a model of moderation in the troubled Latin American region, despite its military government and the severe inequalities of wealth distribution. The country with its enormous area, rich resources, traditions of tolerance, and large population was already fairly clearly a major economic player of the future – though Brazilians whom I began to know used to say sadly about themselves ‘we are the country of the future, and we always will be’.  Another rather sarcastic local joke was that Brazil should be renamed ‘Belindia’ - meaning a mixture of Belgium and India – because of the gap between first-world central Sao Paulo and the surrounding poverty of much of the rest of the country. Elections, at least indirect ones for State Governor posts, were imminent that autumn, as part of the obviously tired military government’s plan for a phased return to civilian rule, and Brazil’s private enterprise system had flourished since the 70s, along with its major state-owned companies in the energy, mining and steel sectors – despite the shock of the petroleum crisis of 1974, which had instigated the government to invest hugely in developing sugarcane alcohol as an oil substitute (I drove an alcohol-powered car). But the country had been too ambitious in that decade, borrowing too many petro-dollars from over-eager western bankers, all to finance a nuclear power programme, huge hydroelectric projects,  and steel and aluminium plants. Some of these were in the Amazon forest area, something which was really beginning to worry environmentalists. The whole plan depending on the continuing export-led growth which was the basis of the strategy followed by the then-admired but later vilified tech-nocrat and Finance Minister Antonio Delfim Netto. But debt service charges in 1982 of $18 billion – on a gross debt of $90 billion - consumed almost 90% of the country’s export earnings.

The spectacular Mexican and Argentine financial collapses of that year, together with the Falkland’s war, and the high interest rate policy followed in the USA, all meant that lenders’ confidence was rapidly dispelled, and that banks began to want to desert the entire region.

Brazil was forced late in that year to turn to the US and to the IMF for help. A rescue operation involving governments, the World Bank and the IMF plus the major lender banks staved off the immediate crisis, but the debt problem remained critical over the next few years as the banks, especially European ones, remained reluctant to extend short-term finance and only lent under duress from the US and IMF. I saw the effects for myself – projects financed in Eurodollars by British banks in Brazil,  such as a coalmine in Rio Grande do Sul and an urban light railway system in Recife, ground to a halt for several years ( though I attended the eventual inauguration of the latter before I left Brazil). I met many worried bankers visiting Brasilia in 1983/4 anxious to reschedule loan repayments to stave off default. I accompanied the Bank of England’s special adviser on Latin American affairs not only to meetings at the Brazilian Central Bank but also to see industrial and agribusiness  projects in northern and central Brazil, including what was then the world’s largest soya farm in Sao Paulo state. I helped officials from ECGD, the British export credit guarantee agency which had stood behind our lenders, to negotiate three bilateral debt rescheduling agreements with the Brazilian Central Bank in 1983.  

The British Treasury insisted in Paris Club creditor government meetings that adjustment policies must continue, whatever the painful social effects in Brazil, which made the UK unpopular in official Brazilian eyes, so the debt problem took on an extra political charge. In that year too, the major Latin American countries set up a semi-politicised debtors’ club, called the Cartagena Group, whose meetings I recall were anxiously followed in London and other western capitals for any sign of imminent decisions to default on loan repayments.

By 1985, things had improved. Brazil had returned to full if rather unaccustomed democracy under President Sarney, and despite severe pressure on its social and political stability and the loss of a decade’s growth as a consequence, almost everyone in the country thought, of the debt crisis and the harsh adjustment policies insisted on by the IMF – its Portuguese initials FMI perceived at the time locally as standing for Fome, Miseria, Injustica  (Hunger, Misery and Injustice ) - the crisis had been contained. The worry remained however that with the debt total at $104 billion in 1985, and the new government’s Finance Minister Dilson Funaro defiantly unwilling to replace the IMF’s three-year programme or ‘accept austerity’, Brazil might follow Peru’s lead and actually be tempted to default.

In early 1986, after I had returned to Britain, Brazil was facing paying out $10 billion per year abroad for the foreseeable future. But somehow those repayments were rolled over into 1987.                    

Later in the decade, the ‘Brady bond’ system of restructuring payments helped to reschedule Brazil’s and the other Latin American debtor countries’  loan   maturities over a period of years, and this coincided with banking regulators requiring a progressive annual write-down of creditors’ loans to levels manageable for both lenders and debtors. In the end, no taxpayer-financed bailouts of banks stricken by Latin American lending decisions were ever needed. But bankers in their usual herd-like way shunned business investments in Latin America until well into the 1990s, when they returned. Then in the next decade trouble struck again, as the Argentine default in 2001 triggered a recession and caused debt problems which still affect that country’s access to international capital markets.

Once more, worries about Brazil’s reliability resurfaced, but a $30 billion IMF rescue package, plus the determination of the incoming Lula administration to continue with fiscal austerity into 2003 and beyond, successfully turned market sentiment around. Nowadays everyone agrees with the positive market view of Brazil as a natural founder-component of the so-called BRICs group of emerged economies – but it was a bumpy road getting there.

The Latin American debt crisis of the 80s seemed at the time to be potentially as great a threat to the world’s economy as do the new problems of today. Had Brazil and others actually repudiated their debts, several banks would probably have failed, and the contagion would have spread, as investors were not always able or willing to distinguish countries with a liquidity problem from those facing real insolvency. But in retrospect the ‘Third World debt crisis’ fears of the 80s were overdone.

The confidence I felt – and recorded at the time in my reports to London -- in Brazil’s long-term economic prospects, based on my visits to some of the country’s enormous agribusiness and industrial projects, has been justified, as the country really seems set to fulfil its great promise at last. Huge oil finds in recent years and booming commodity exports, and the policies of a successful Lula Presidency, have greatly lifted both Brazilians’ self-confidence and foreigners’ perceptions of the country, compared to the often uncertain and pessimistic feelings which I recall so well from the 80s.

Worries over the future of the euro are likely to continue to dominate the economic news in 2011. But despite the rolling crises in a series of peripheral Eurozone countries, so far at least the determination of key members to keep the zone functioning has prevented an outright default by any country or a departure from the currency union. We shall see in 2011 whether a default or a sovereign debt crisis will be averted, but in the longer term some sort of debt restructuring looks inevitable. Perhaps that is the closest parallel with the Latin American experience of 30 years ago.