Big buzz saw is closer as crisis grips Brazil

Devaluation: Asian contagion hits a large economy, cries out for deficit reform to keep boom from bust.

January 15, 1999

THE ASIAN disease did not hit the healthy United States when it reached Brazil, which devalued its currency Wednesday. But spread of the ailment to the world's eighth-largest economy means the sickness has infected the Western Hemisphere.

U.S. trade with Brazil is small but growing, while U.S. private investment in Brazil is huge. So the threat of inflation and devaluation in Brazil is more to U.S. portfolios than to U.S. exporters.

The $41.5 billion credit pledged to Brazil by the International Monetary Fund and Group of Seven nations in November, in return for deficit reduction, was in the U.S. national interest. It now appears to have failed.

Brazil's trauma is linked directly to the Asian crisis. The credit shortage precipitated by failed loans in Asia curtailed credit, investment and confidence in Brazil.

But Brazil differs because it suffers from massive government deficits, while Thailand, Malaysia, Indonesia and South Korea were undone by bad debts in the private sector.

The next logical target is Argentina, which went through painful reforms and has sturdier defenses. Its currency board, designed with the help of Johns Hopkins University Professor Steve H. Hanke, pegs the peso rigidly to the U.S. dollar, so far with great success. Advisers to Argentina's President Carlos Menem will happily lecture Brazil's President Fernando Henrique Cardoso on financial discipline.

President Cardoso's economic management did reduce inflation and bring the Asian miracle, but it did not prepare for the subsequent Asian bust. Brazil will not stop capital flight unless it curbs public spending and dissuades its states from defaulting on debt, not easy things to accomplish.

Brazil's descent comes when Thailand and South Korea appear to have hit bottom and begun slow recoveries. Malaysia and Indonesia may have made economic progress, but their political crises prevent confidence.

Brazil's plight shows that global dislocations are not over, not that worse must come. Containing the contagion is the Clinton administration's challenge, which it knows.

Don't tell House managers or Senate jurors, but Mr. Clinton will be judged by history on how well Treasury Secretary Robert E. Rubin and Deputy Secretary Lawrence Summers cope this month.

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