‘Asian Contagion’ brings Brazilian austerity

Weekly News Update on the Americas, issue #408, 23 November 1997

On Nov. 10 Brazilian president Fernando Henrique Cardoso announced a package of 51 austerity measures to shore up the real, the dollar-backed currency he designed in 1994 when he was finance minister; the real's success in curbing inflation is credited with Cardoso's victory over Luis Inacio Lula da Silva of the leftist Workers Party (PT) in presidential elections in October of that year [see Former Leftist Cardoso Wins Presidency in Brazil, Weekly News Update Supplement 10/8/97]. The austerity plan is expected to save the government $20 billion by laying off 33,000 government federal temporary workers; freezing government workers' salaries in 1998; raising the income tax 10% for two years; and raising taxes on gasoline, cigarettes and alcoholic beverages by 5%. The new measures followed a series of dramatic declines in Brazilian stock markets set off in late October by the Southeast Asian financial crisis [see Update #404], and the Oct. 30 decision by the Brazilian Central Bank to double interest rates to more than 40%. The markets fell again by about 6% on Nov. 7, precipitating the announcement of the austerity plan. [New York Times 11/11/97; Washington Post 11/11/97]

We are very worried that these measures, along with the increase in the interest rates...will create recession and constrain the economy, said Horacio Lafer Piva, vice president of the Sao Paulo Federation of Industries. [WP 11/11/97] Brazilian stocks were hit again on Nov. 12, with the Sao Paulo exchange plunging by 10.20% and the Rio de Janeiro market by 10.18%. The Dow Jones index of New York stocks fell 2.08%, and the Mexican stock index fell 4.25%. [La Jornada 11/13/97] Asia is much worse than people think, said David Shulman, chief equity strategist at Salomon Brothers in New York, and the Asian contagion has moved to Brazil. [NYT 11/13/97]