The main purpose of assessment is to analyze the economic condition of Brazil between two period which is selected which are 1980 and 2002. The assessment focuses on debt crisis situation which affected the country in both the selected period. The assessment conducts a comparative analysis between the 1980 crisis and 2002 crisis in order to establish any similarities or differences between the two situations. The analysis consists of graphs and statistical analysis for the purpose of more detailed discussion and analysis. The assessment also aims to point out the main reasons which initiated the economic crisis in the first place.
The recent debt crisis of the business which the economy of Brazil has faced in recent year is shown for 2002. The IMF in 2002 granted the central bank of Brazil a boost by sanctioning them with a debt of $ 16 billion in international reserves for defending the weak currency of the country. The debt was not only borrowed by Brazil but also some other Latin America countries such as Argentina. The main purpose behind such borrowings made by the government was not only to recover the weak currency situation in the country but also to promote rapid industrialization in the economy (Sen and Grown 2013). The world economy was shifting towards industrialization and therefore to keep at par with rest of the world, Latin American Countries started taking loans from IMF and other countries. An example as provided above shows condition of Brazil where IMF granted Brazil up to $ 16 billion and in addition to this also promised a further in total of around $ 30 billion.
As per the statistics available, the debt crisis of 2002 was very much severe on most of the developing countries and especially Latin American countries. It is estimated that around 2/3rd of the financing for countries like Brazil, Mexico were being done through domestic debts while the remaining I/3rd of the funds were procured from international sources such as other countries and International Financing Institutions like IMF (Hermes and Lensink 2013). As per the estimates of the economists, the national debt which was taken by the government came to about $ 250 billion.
The main reasons which can be identified for the debt crisis which Brazil and other Latin American countries faced during the period was mostly due to the economic downturn which had affected the nation. The closest neighbor of Brazil is Argentina who at that time was facing from economic crisis which was mainly to the policy of the country to apply deficit financing (Reinhart and Rogoff 2013). The economy of Brazil was engaged in trade and commerce with Argentina and therefore the debt crisis also affected the Brazil. The effect of Argentina impacts the economy of Brazil and further resulted in the fall of the value of the currency. The government of Brazil decided to reduce the overall use of debt capital and bring about a stability in the value of currency of the business. The IMF further offered an assistance of $ 10 billion for the purpose of bridging the gap.
Another reason which can be identified for the increasing pressure of debt of the business is due to the high rate of inflation which affected the economy adversely. The prices of the commodities kept on increasing on a continuous basis which resulted in increase in output costs of the economy (Beirne and Fratzscher 2013). There are other minor reasons which also caused increase in debts of the country which are fiscal deficits, unfavorable Balance of Payments of the country. However, the most important factors which resulted in the hike in the debts of the economy is due to the impact of economic downturn of the neighboring nation Argentina and the same impacted the debt servicing ability of Brazil. Then three is the situation with the inflation which continuously raised the prices for inputs and further increased the output costs in the country. This affected the ability of the nation to appropriately service the international debts.
The nation of Brazil and also other Latin American nations faced significant debt crisis in the year 1980s. The main role in this debt crisis with the perspective of Brazil can be attributed to the working class of the nation. The working class played a vital role in every juncture of the debt crisis which affected the whole nation. The struggle and protest of the working class of people in Brazil resulted in a part of debt being written off in the year 1987. The main reasons which can be identified for the debt crisis which affected the economy of Brazil was due to the political turmoil which affected the nation after the elections of 1974. In addition to this, there was a significant increase in the prices of oil which affected the economy of Brazil. The nation was one of the leading importers of oil and therefore, it naturally affected the Balance of Payment Status of the country. In order to improve the situation, the government started to takes lumpsum amount of loans from international sources. The money which was acquired from loans was not put to productive use and therefore the government was not able to generate appropriate amount of revenues and this further added to the debt crisis which the nation was already facing. The hyperinflationary situation which the nation was facing further added to the misery and enhance the impact of the debt crisis on the nation.
Brazil is a developing nation and therefore oil is a basic requirement for industry and a means for power which is a crucial aspect in industrialization. The economic crisis which initiated from the inability of the nation to service the debts resulted in hampering the growth of the nation and severely affected the ratings and the balance of payments of the nation. This was not the case with only Brazil but also other Latin America nations such as Mexico, Argentina and others. In addition to this, the value of the currency had also fallen in comparison to US$ which had direct consequence on the interest of the loan and also the imports which was made by the organization.
The main reasons which can be identified for such a crisis in not only Brazil but also in other Latin America Countries is the hike in the prices of oil. The Latin American Countries were major importers of oil from other countries and Brazil was no exception. During the 1980s, the world economy has also fallen sharply which had resulted in the increase in the prices of oil which affected the economy of such Latin American Countries. As these countries were developing and oil is a major component which acts as fuels, resulted for these countries to take loans from international as well as domestic sources.
Another reason for the debt crisis is the hyperinflation situation which the country was facings during the 1980s. The prices of the commodities in the country was on continuous rise and this affected the overall debt servicing position of Brazil. The inflationary situation continued from 1980s and continued further for some time which affected the economy drastically and thereby took away the ability of the country to effectively service the debts of the business. There are other reasons which have also contributed to the debt crisis in the economy such as the deficit financing practices of government, political turmoil situation in the country and similar other factors.
Figure 1: (Table showing rate of Inflation growth in the economy)
Source: (IMF Financial Statistics)
The above table effectively shows the growth in inflation for the five years period starting from 1981. The highest inflation percentage is shown for 1985 which is shown to be 226%. This resulted in depreciation in the value of the currency and further contributed to the problems of the economy. The inflationary pressure further induced the government to take loans for the purpose of stabilizing the economy. The major concern was that the debts which was taken by the nation was not put to productive use by the nation which resulted in economic crisis situation in the country in 1980s.
After discussing contemporary episode and past episode of Brazil’s debt crisis, the report intends to compare these two based on various factors.
During 1970s, Brazil and other countries of Latin America borrowed huge amount of money for the purpose of industrialization. In 1983, these countries again borrowed from overseas up to half of its national income. The chief problems related to this debt crisis occurred during 1970s when oil prices raised drastically and became more than 300 percent (Kaminsky and Vega-Garcia 2016). Brazil and other Latin American countries were the net importers of this product. As a result, these countries experienced higher costs for import costs. During this period, the world economy also declined significantly. This in turn adversely affected growth of Latin America’s countries (Puente and Etchemendy 2017). Therefore, Brazil and other countries like Argentina and Mexico experienced difficulties to repay their debt. This economic phenomenon led these countries of Latin America to experience currency depreciation. As a result, these countries experienced more difficulties to pay their debts. The interest rates in Western countries increased during the early phase of 1980s (Devlin 2014). These economic factors indicated that national income off Brazil and other countries were insufficient to pay these interest repayments.
In 2002, Brazil experienced debt crisis for the second time. The amount of national debt of this country became $250 billion. Economists further predicted that this amount could be increased and consequently the country could become a defaulter. During this year, Brazil’s economy experienced deficits in its fiscal account and current account. Moreover, effect of Argentina’s crisis also affected Brazil’s economic condition noticeably (Guilhoto and Hewings 2017). During the middle of 2002, economist intended to change economic policies of this country by large extend. During this situation, political condition also stimulated the entire situation towards a negative direction. The economic condition of Argentina suffered drastically due to deficit spending (Cantamutto and Ozarow 2016). Moreover, the country experienced higher amount of debt. Therefore, to overcome this situation, Argentina reformed its economic policies from various sides, such as, implementing fixed exchange rates with the US dollar. Brazil is the largest neighbour as well as trading partner of Argentina (Gezmi? 2018). Therefore, economic downturn of this country has negatively influenced economic condition of Brazil. However, the impact of this debt crisis was not deep one like the previous one. As a result, the International Monetary Fund rescued maximum amount of borrowed money from this country.
After discussing these two scenarios relating to the debt crisis of Brazil, it can be observed that the reasons of these two types of crisis have some differences. The chief reason for the debt crisis of 1980s was oil price shock. This declined terms of trade of this country. Moreover, increasing interest rates in world market negative influenced balance of payments of this country. Thus, all economic consequences influenced economic condition of Brazil directly. To overcome this situation, the IMF started its austerity program since the end of 1979 to 1984. During this period, inflation also accelerated the condition of currency devaluation and continuous growth of the country’s public debt. It can be observed that during the middle of 1980s, domestic debt of Brazil exceeded foreign debt and this in turn became chief problem for Brazil’s economy.
On the contrary, the chief reason of Brazil’s crisis in 2002 occurred due to the crisis of Argentina. During this period, Argentina experienced currency devaluation in terms of the US dollar. In addition to this, the country also borrowed significant amount of foreign currencies during this period. As a result, the country could not deal with its many economic shocks. As Brazil is the largest trading partner of Argentina and neighbour also, this economic downturn influenced Brazil’s economy adversely.
The similarities during this debt crisis can also be described. Latin American countries including Brazil and Argentina experienced huge crisis in 1980s and 2002. To recover these countries from this adverse condition, the IMF played significant role. To recover from the debt crisis of 1980s, this financial institution supplied money for repaying loans. Through this, the IMF helped each countries of Latin America to pay their unpaid debts. For doing so, this international institution forced these countries of Latin America to reform their market structure for reducing inequalities and poverty (Ethier 2016). Before 1980s, countries of Latin America borrowed money for maintaining stable economic condition and lower poverty rate. However, due to huge amount of foreign debts, the many foreign banks stopped to provide loans in this country.
The IMF also played significant role to reduce crisis of Argentina in 2002. This international institute helps the country to restore its capital markets again (Dullien, Fritz and Mühlich 2018). Moreover, the IMF provided various supportive programs during this period to help Argentina for achieving economic growth, stabilisation and other market related reforms.
Within 1980s and 1990s, Brazil was characterised by the tendency of stagnation. This stagnation was related to deep macroeconomic disequilibrium. This disequilibrium occurred due to increasing inflation within country. Due to these macroeconomic factors, Brazil’s economy increased by 1.25 percent per annum with the year 1980 and 1992. This in turn reduced the value of per capita income to 7.6 during the same period (Pénet 2018). However, this period was deeply characterised by external disequilibrium, internal disequilibrium and the strategy of post war development. Hence, economists called this period as lost one. This crisis occurred through following a long trend of economic consequences. The oil price shock during 1970s initially has created account deficits in Brazil along with other countries of Latin America. Moreover, this oil price increase has generated surpluses in current account of oil exporting countries. However, oil importing countries like Brazil and Argentina experienced deficits due to this higher oil price. As a result, countries of Latin America borrowed money from commercial banks of the US. Moreover, the number of other non-bank creditors increased drastically during the period of 1970s. At the end of 1970, total amount of foreign debt of Latin America was $29 billion (Puente and Etchemendy 2017). However, after 8 years, the amount of total foreign debt increased to $159 billion. Moreover, in 1982, this amount became $327 billion.
During this period, economists noticed potential risks that countries of Latin America and other less developed countries experienced. Moreover, almost zero interest rates on short-term loans as well as expansion of world economy justified this situation during the early of 1970s. However, during the later part of this decade, these industrialised countries intended to lower the level of inflation through tightening the monetary policy of Latin America. As a result, the value of nominal interest rates increased all over the world. In 1981, the world economy experienced recession (Sandleris and Wright 2014) During the same period, commercial banks reduced their re-payment periods and charged higher amount of interest rate for their loans. As a result, Latin American countries realised unstable debt burdens within their economy. However, the existence of this crisis became prominent when Mexico, a country of Latin America, declared to IMF and the Federal Reserve that it could not pay this huge amount of debt worth $80 billion (Gruppe et al. 2017). Other countries also informed the same thing. After that, almost sixteen countries of Latin America rescheduled debts along with other eleven lower developed countries. To manage this situation, many commercial banks stooped to provide overseas loans and tried to collect funds from their existing portfolios of loans. This reduction of bank loans led many countries of Latin America to experience deep recession.
In 2005, Argentina started to restructure its debt. However, the economy experienced recession during 1998 and 2002 (Damill, Frenkel and Rapetti 2015). The country became huge defaulter for it external debt. As a result, foreign countries stopped their investments and foreign banks ceased their capital flows towards this country.
Conclusion:
The above analysis reveals information about debt crisis which affect Brazil and other Latin American Countries in 2002 and 1980. The analysis shows that in both the periods the nation os suffering from a situation of high inflation which increases the output costs and the prices of the products. However, the situation in both the periods are quite different and has different impact on the nation as a whole. The similarities in both the period analysis is that the nation in both the cases had negative or unfavorable Balance of Payments which was mainly due to the high debts which was taken by the government during these periods. In addition to this, the origin of the debt crisis which Brazil has faced in both the periods is quite different from one another and therefore their overall impact is also different.
Reference:
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