Why Brasilia sees the euro crisis as a once-in-a-generation opportunity.
- By Eduardo J. GómezEduardo J. Gómez is assistant professor of public policy at Rutgers University at Camden.
The news that Brazil has overtaken Britain to become the world’s sixth largest economic power is being touted as a sign that that the longtime "country of the future" has finally arrived. While the celebrations have been somewhat muted by concerns over slowing GDP growth and the country’s still-heavy dependence on high energy and food prices, Brazil is heading into the coming global showcases of both the 2014 World Cup and the 2016 Summer Olympics with more than its usual swagger.
But this emerging economic prominence is raising the question of just what kind of actor Brazil will be on the world stage. In the past 20 years, Brazil has become well known for turning crisis situations into geopolitical opportunities, becoming a leading voice in international forums devoted to AIDS, poverty, and even the environment. And now, it is doing it again with a challenge that Brazilians understand all too well: a debt crisis.
Only this time, it’s Europe in need of a helping hand, not the former Portuguese colony in Latin America. At an EU-Brazil summit held in Brussels last October, President Dilma Rousseff told European leaders, who had asked for assistance: "You can rely and count on us." As an initial strategy, Rousseff and her finance minister, Guido Mantega, considered using their foreign exchange reserves — estimated at $352 billion — to purchase debt through treasury bonds. However, after consulting with her BRIC colleagues at a meeting in Washington last November, Brazil decided that buying EU bonds would be too financially risky, and proposed instead to indirectly assist Europe by donating an estimated $10 billion to the International Monetary Fund.
There is a grander strategy at work here beyond seeking to help Europe in its hour of need. The IMF contributions stem from Rousseff’s intention to maintain a tradition that began under her predecessor, President Luiz Inácio Lula da Silva, of using foreign assistance as a means to strengthen Brazil’s international reputation and influence. Yet another example is Brazil’s annual contributions to the World Bank, which have averaged $253 million from 2004 to 2009. Brazil was the first nation to contribute — $ 55 million — to the World Bank’s Haitian Reconstruction Fund. From 2003-2007, Brazil also gave approximately $340 million to fund the U.N.’s operations. Lula also increased Brazil’s contribution to the U.N.’s World Food Program from $ 1 million in 2009 to $ 27 million in 2011.
There’s also the satisfaction of seeing the tables turn. Because of Brazil’s recent economic success and reputation, the IMF has approached Brasília for help for the first time. Back in 1998, it was the Brazilian government, under President Fernando H. Cardoso, that was running to the IMF for assistance. Brazil was trying to recover from a capital flight of roughly $30 billion dollars, triggered by a lack of foreign investor confidence due to exorbitant debt and recession. To help quell investor speculation that Brazil would default (like Russia did months earlier), the IMF provided a bailout package of $41 billion on the condition that Cardoso prune government expenditures by 20 percent and reform the pension system.
Then in 2001, after a steep decline in foreign investment, currency depreciation, and a debt crisis in neighboring Argentina, Brazil essentially begged the IMF to help avoid a default on its external debt. This time the government received $15 billion in exchange for reducing federal expenditures and maintaining a primary budget surplus of approximately 3.75 percent through 2005.
Today, Brazil seems to be relishing the opportunity to impose conditions on the IMF: Last October, Brasília made it crystal clear that it will not help the IMF should it decide to continue imposing austerity measures on European states. Much to Brazil’s chagrin, however, last month the IMF and the EU provided a bailout package of 130 billion euros to Greece with stiff austerity measures attached, grudgingly passed by Greece’s parliament — a slight that may explain Brazil’s delayed assistance to the IMF. What’s more, Finance Minister Mantega has told the EU that Brazil will only provide IMF support as long as the EU strengthens its Central Bank and if other European nations contribute to the European Financial Stability Facility, the special relief fund set up provide a firewall for heavily indebted economies.
Rousseff also wants an expanded role for Brazil within the IMF, along with the other BRICS, mainly through increased quota shares and voting rights. She has joined her colleagues from China, India, Russia, and South Africa in emphasizing that the IMF needs to recognize the importance of the world’s largest emerging economies and allow for opinions and recommendations from nations that have overcome their economic hurdles and that more accurately represent the developing world.
Despite the IMF Governing Board’s agreement in 2008 to increase the BRICS’ quota and vote shares, and despite the Board deciding to shift more than 6 percent of the quota shares to them and other nations last December, these recommendations have yet to be officially adopted and ratified into the Articles of Agreement. What’s more, analysts and the BRICS believe that these changes are insufficient, especially in light of the US and Europe’s substantially higher quota shares, voting rights, and the BRICS’ growing importance to the global economy. Mantegna and Rousseff hope that the Euro crisis will be an opportunity to address this imbalance.
Europe’s crisis has also accelerated the shifting power dynamics between Brazil and its former colonial power, heavily indebted Portugal. Rousseff has not only proposed to buy Portuguese treasury bonds, but she has also considered the possibility of early buybacks of Brazilian bonds held by the Portuguese government, which would help reduce Portugal’s debt by retiring bonds at a discount while stabilizing the bond market. While Mantega has expressed his reservations, given Portugal’s potential inability to repay and the legal limitations on using Brazil’s foreign reserves for buying debt, Rousseff still seems firmly committed to these options, stating that she will do "everything to help" and pledging to lend a hand. Rousseff views Portugal’s recession as an opportunity to strengthen bilateral political and economic ties, helping overturn years of jealousy and envy over Brazil’s success. And she has often invoked simple gratitude as a motive, referring to Portugal’s past assistance in Brazil’s time of economic crisis.
But cultural affinity and altruism can only explain so much. Several Brazilian companies have invested in Portugal in recent years, with a total investment of $ 65 million in 2008, increasing to $ 310 million in 2009. Rumor has it that Petrobras, Brazil’s state-owned oil company, is planning to purchase 33 percent of Galp, Portugal’s leading petroleum company. Portuguese businesses have also invested heavily in Brazil. And in January 2011, Portugal’s Telecom acquired 25 percent of Brazil’s biggest land-line phone company, Oi, for $5 billion. Last year overall, Portugal’s investments ranged from the energy sector, to tourism and construction, tallying approximately 25 billion euros.
Of course, engaging with Europe carries risks at a time when Brazil’s own economic future — generally attributed to high tax rates, inflation, an overvalued currency, and high public sector deficits — isn’t exactly guaranteed. The government projects the country’s economic growth will not exceed 3.4 percent this year — it was 2.7 percent last year, down from 7.5 percent in 2010 — so Brasilia may not have very much cash to spare come 2013.
Despite these economic risks, Rousseff’s European strategy is a smart move. By providing financial support in time of need, Brazil can strengthen its partnership and economic relationship with several European countries, as well as with the IMF. And by lending a hand, Rousseff may be able to garner more European support as she strives to boost Brazil’s influence within the U.N. system and the IMF. Through these calculated endeavors, Rousseff can signal that Brazil isn’t just arriving on the international scene, it’s here to stay.