The New York Times
September 20, 1998
Brazilians Fret as Economic Threat Moves Closer


               SAO PAULO, Brazil -- Until recently it seemed that Augusta Aparecida Pettinari's fortunes
               and the country's economic reform plan ran on parallel tracks, like twin locomotives taking the
          young receptionist and the modern currency toward a steadily more promising future.

          As once-rampant inflation was brought down to negligible levels, Ms. Pettinari joined an emerging
          class of consumers, whose salaries for the first time maintained their purchasing power from one
          paycheck to the next. She smiles now as she remembers buying appliances, going to the movies and
          writing a check for a new dress.

          "I was able to have a social life," she said.

          The man Brazilians elected president four years ago in gratitude for taming inflation was Fernando
          Henrique Cardoso, the former finance minister. To back the new currency that gave his Real Plan its
          name, there was an array of proposed structural changes to attract foreign investment, privatize state
          industries and reform social security, the Civil Service and tax systems.

          But now, two weeks before the Oct. 4 election, in which Cardoso is to seek another term in office,
          the financial tornado that has devastated parts of Asia and Russia has begun spinning toward Brazil.

          In the last month, nearly $1 billion a day in foreign reserves has been flying out of the country, while
          the black-market rate for dollars has veered from 2 cents above the official rate to more than 30

          Over the last seven trading days, the stock market has bounced from 15.8 percent losses one day to
          18.7 percent gains the next, and then back down again last week after Alan Greenspan, the U.S.
          Federal Reserve Board chairman, ruled out lowering interest rates. The country has doubled the
          ceiling on interbank loan rates, to 49.75 percent from 24.75 percent.

          And suddenly the train that Ms. Pettinari once thought was carrying her steadily upward toward
          prosperity feels more like a roller coaster. Come Oct. 5, the day after the election, the
          now-unemployed receptionist confesses, she has no notion at all where this wild ride will take her.

          "If we stay along the same lines we've been on, we'll manage," said Ms. Pettinari, 28. Then she
          recalled her country's last economic crisis in 1990, when Fernando Collor de Mello began his
          presidency by freezing all personal bank accounts and allowing Brazilians access to only $50 each.
          "But who really knows what lunacy is coming?"

          Brazil, the world's ninth-largest economy and the pace-setter for Latin America, is once again in
          danger of collapse, this time crippled by growing current account and fiscal deficits.

          While Brazil does not have the threat of political instability or nuclear weaponry that makes a
          breakdown in Russia so fearsome, the opening of its markets has drawn billions of dollars in U.S.
          investment, and its fall would bring economic turbulence dangerously close to U.S. shores.

          Brazil's budget deficit, at 7.5 percent of gross national product, and its current account deficit, at $35
          billion, threaten to swell further with the steep interest increases of recent weeks, despite
          announcements of drastic budget cuts.

          Over the next two months, some $80 billion in Brazilian debt will come due. According to Merrill
          Lynch, U.S. banks had $27.2 billion at stake in Brazil at the end of March. In Russia they had only
          $6.8 billion tied up. Moody's and Standard & Poor's downgraded Brazil this month.

          For now, voters are holding fast to Cardoso, as the most responsible figure to face the looming
          crisis. In the most recent poll, 49 percent of those who responded supported him, a 27-point
          advantage over Luis Inacio Lula da Silva, a former autoworkers union president and three-time
          presidential candidate of the leftist Worker's Party.

          "Lula would be very strong on social issues, but a president isn't only that," said Daniella Cristina
          Turri, a 20-year-old office worker who has been trying to find work for four months. "The most
          important thing is the economy. It's the basis for everything else."

          Already months behind on her night school tuition, however, Ms. Turri is no longer sure that she will
          vote for Cardoso.

          "Everything's getting worse for us," she said. "There are times when you think about leaving the
          country, because it doesn't give you any way to make a living." Unemployment in Sao Paulo, the
          financial and industrial heart of Brazil, is 19 percent, and is expected to worsen.

          Though he is still well liked on Wall Street, Cardoso has lost credibility as investors battered by
          losses in Asia and Russia weigh his failure to deliver needed reforms. On his first presidential visit to
          the United States, in April 1995, Cardoso visited New York before Washington, underscoring the
          importance of investment to his country's future.

          The president won fans in world financial capitals by removing exchange controls, opening markets
          and selling off state industries. Last year, with $17 billion coming in, Brazil became the world's
          third-largest market for direct foreign investment, following the United States and China.

          But Cardoso proved less successful at getting the government to live by the same fiscal discipline
          forced on middle-class Brazilians. Politically costly overhauls were put off, as with tax reform, or
          fumbled, as with social security reform, or passed but not carried out, as with civil service reform.
          An assembly line of privatizations, however, helped offset soaring government costs.

          Cardoso contends that Brazil's vulnerability is not his or the country's doing, but the product of
          outside forces, and he is calling for a new international monetary system for the global era.

          The market reacts to every sign of outside backing for Brazil, in the form of reduced U.S. interest
          rates, a bailout by the International Monetary Fund, or an IMF line of credit. But so far, Brazil has
          not formally requested an IMF bailout and Cardoso is loath to embrace IMF conditions before
          election day.

          The government had already announced cutbacks to raise a primary account surplus of 0.87
          percent, but reports here say the IMF would demand a primary surplus closer to 3 percent next year
          as the price of its bailout. The primary account covers revenues less expenses, without interest on

          These days, Cardoso is walking a delicate line to election day, nudged by his politician's instincts that
          suggest that doomsday speeches about tax increases, unemployment and sacrifice are not the stuff of
          landslides, and by an international investment community clamoring for proof that Brazil will get its
          fiscal house in order soon.

          "The only positive byproduct for Brazil is that he'll have to do these fiscal reforms," said Joel Korn,
          president of the American Chamber of Commerce in Rio de Janeiro.

          Brazil's most likely initial steps will combine tax increases, import restrictions and cost-cutting
          measures. Investors are expecting Cardoso to push through reforms before the lame duck Congress
          dissolves at year's end.

          The president has ruled out a devaluation, which would undoubtedly reignite inflation, but it is by no
          means certain, investment analysts say, that the country will not be forced into one. In recent days,
          the stream of reserves leaving Brazil has slowed to under $500 million a day, and the difference
          between official and black-market exchange rates has narrowed.

          More than ever, it appears that Cardoso, who spent considerable time and political capital pushing a
          constitutional amendment through Congress allowing presidents to run for re-election, will win on the
          first round. But he has never stood closer to seeing his legacy crumble in his hands. His inauguration
          is expected to be not so much a coronation, as his rivals once feared, but the threshold of a new era
          of sacrifice.

          Even those struggling through a shrinking economy, though, say they would prefer sacrifice over
          inflation. Ms. Pettinari has been watching the sandwich boards with job offerings on Barao de
          Parana Piacaba street since April, when she lost her last job.

          She got married five months ago, but both she and her husband, who had been a bill-collector, are
          out of work, and have to live apart, he with his parents, she with hers.

          "If it weren't for them, I'd go hungry," she said.