Will Brazil Restructure Its Economic Debt?

Central Bank of Brazil

The economy is mature but the Government, an adolescent.” That’s the way Gustavo Franco, a former president of Brazil’s central bank and a Harvard-trained economist, recently described how the country’s handling of public finances is viewed by many foreign investors. To be sure, when it comes to honoring obligations with its creditors, recent history is not on Brazil’s side. In the last twenty years, Brazil has defaulted on its domestic debt three times, during “Cruzado,” “Bresser” and “Collor” economic programs, in addition to three “technical” defaults on the foreign debt, in 1982, 1986 and 1990.

Now, in the jockeying ahead of the 2002 presidential elections, the issue of restructuring Brazil’s estimated $200 billion of domestic debt has reemerged, thanks largely to another well-known Harvard personality from Brazil, law school professor Roberto Mangabeira Unger. Unger is the principal advisor to Ciro Gomes, the presidential candidate from the northeastern state of Ceará whose rapid rise in the polls and much-publicized romance with actress Patrí­cia Pillar has made him the darling of the Brazilian media. Together, Gomes and Unger are advocating a re-negotiation with the Government’s creditors that would hopefully result in longer maturities and lower interest rates on Government bonds. They say their proposal would lay the groundwork to narrow the budget deficit, which at the equivalent of 12 percent of gross domestic product is the main stumbling block to sustainable economic growth.

Their proposal is risky, having already been characterized by President Fernando Henrique Cardoso and some investors as a “default.” Unger, though, sees it differently. “One thing is not paying creditors. Another is changing the context in which you bargain with them,” Unger says in “The Second Way: Present and Future of Brazil,” a type of manifesto distributed by Carta Capital, a Sí£o Paulo-based magazine. Part of the way Brazil could change the bargaining context would be to charge the central bank with controlling the entry and exit of capital flows. The key ingredient for making all of this work would be a “Government capable of exchanging colonial fatalism for a commitment to Brazil.”

Of course, the elections are a long way off. And Cardoso’s Government has been able to gradually lower the interest rates it pays on its debt in recent months in an effort that could eventually accomplish what Unger and Gomes say could only be attained through tough negotiation. Yet Unger isn’t losing any time, after saying that he may run for mayor of Sí£o Paulo in a campaign that would give him lots of space in the media to espouse his views. And Gomes? The 41-year-old former finance minister, who also spent time at Harvard as a visiting researcher in 1995, is basking in the attention that his campaign, and his proposal for restructuring Brazil’s debt, are receiving so far. “I don’t want to become President of the Republic by fooling anyone,” he says. “I want to be elected with the public having clear knowledge of my proposals.”