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1 1 (Updated June 19, 2000)

handle is hein.crs/crsabds0001 and id is 1 raw text is: 98-987 E Updated June 19, 2000 CRS Report for Congress Received through the CRS Web Brazil's Economic Reform and the Global Financial Crisis J. F. Hornbeck Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division Summary Despite backing from the International Monetary Fund (IMF), capital flight from Brazil in 1998 prompted the government to jettison its pegged currency stabilization program and float the real on January 15, 1999, becoming another casualty of the volatile international capital markets. Brazil adjusted to its financial crisis faster than expected, which is now considered over. This report provides a final summary of Brazil's financial crisis and related IMF assistance in support of congressional interest in various aspects of the 1990s global financial turmoil. It will not be updated. Facing increasing investor uncertainty and prolonged capital flight, Brazil devalued its currency (the real) on January 15, 1999, following Mexico, Asia, and Russia as the next casualty of the 1990s global financial turmoil. Although Brazil had ample foreign exchange reserves and International Monetary Fund (IMF) support, nervous investors withdrew a net $40 billion from Brazil over the four months following the August 1998 default in Russia. Yielding to market pressures, Brazil attempted an 8% controlled devaluation on January 13, 1999, only to increase investor anxiety and capital outflows. Rather than risk depleting its international reserves in the hope of outlasting the global run on its currency, Brazil chose to float the real, causing a major devaluation that eventually halted capital flight, but left the economy disrupted in other ways. A combination of policy decisions and political events left Brazil exposed to the vagaries of international capital markets. First, Brazil had an overvalued exchange rate and huge fiscal deficits, which together could not be sustained indefinitely. Second, Brazil became increasingly dependent on the very capital markets that tend to abandon countries when they need them most. Finally, two political events in January triggered the final run on the real: 1) failure to pass legislation that would have addressed the large budget deficit that epitomized the country's fiscal excess; and 2) announcement of a moratorium on federal debt payments by a large state government. To grasp how these events made Brazil vulnerable to capital flight, however, it is important to understand the role of economic policies implemented earlier in the decade. Congressional Research Service °* The Library of Congress

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