Like most politicians, Brazilian politicians are both greedy and incompetent. They only care about the present and ignore the future. The result of course leads to a serious financial crisis: just like other places where financial crises have occurred, The Brazilian government's fiscal expenditures also seriously exceed revenue. In the autumn of 1998, Brazil's situation was: the Brazilian government's domestic debt was US$298 billion (although the privatization of state-owned enterprises increased the government's revenue by US$84 billion), and its foreign debt was US$228 billion, of which US$42 billion It's due next year. At that time, Brazil's budget deficit accounted for 7.2% of gross domestic product (BIP).
In this case, the Brazilian government decided to use the most common financial method used by governments, which is to raise interest rates—some even as high as 49.75—to induce funds to stay in the country. However, this has increased the cost of Brazilian public debt, leading to an even greater increase in the amount of debt. Raising interest rates makes it impossible for ordinary people to even afford installment payments, so this move is like pushing the indebted people into the abyss of despair. The heavy interest burden has strangled Brazil's economy, leaving tens of thousands of cars sitting on wasteland. Although the Brazilian government provides short-term foreign investors with an income tax exemption of up to 15 percent, bankers, speculators, or investors have to worry about asking themselves: Can this approach really effectively keep funds in Brazil? Can the Brazilian government enact the necessary measures to stabilize finances? Brazilians themselves are rushing to exchange Real for U.S. dollars for storage, and companies and groups have remitted profits abroad early. In order to find a safe place, funds continue to flow out of Brazil, and eventually even one billion U.S. dollars were lost in a day. miserable situation. The central bank continues to buy reals to support the value of the Brazilian currency. The originally abundant currency reserves totaled more than 70 billion U.S. dollars, but after only a few weeks, by the end of September 1998, only about 47 billion U.S. dollars were left. Brazil's stock exchange index fell from more than 12,000 points to 5,665 points on September 16, 1998. The sudden recession was like a natural disaster that seemed to destroy Brazil completely. Brazil is in danger of economic collapse.
However, as we all know, as the ninth largest economy in the world and the largest country in Latin America, if Brazil falls, the entire Latin American economy will definitely be shaken. It will inevitably affect the United States. Brazil is not only a very important trading partner of the United States, but also has extremely close business relationships with the U.S. banking community. Therefore, as soon as Brazil's financial crisis emerged, the International Monetary Fund stepped forward to negotiate with the Brazilian government on the content of the aid agreement: Brazil could receive a US$41.5 billion aid loan, but the fiscal budget must be reduced to R$8.7 billion. , it must also give up controls on capital transactions, guarantee debt repayments, continue privatizing companies and immediately begin reforming its tax system, labor market and financial system.
News of international aid eased the tense economic situation in Brazil. Investment confidence has sprouted one after another. In October of that year alone, foreign investors had a net remittance of 27.9 million reais and reinvested in the Brazilian stock market. The stock price keeps rising. On November 5, 1998, the amount of funds remitted to Brazil reached as high as 265 million US dollars.
On December 3, 1998, the Fernando Cardoso government submitted the aid agreement reached with the International Monetary Fund to Congress for a vote - but it was rejected! Stupid politicians don't know that this is tantamount to inviting speculators around the world to join in the attack on the real. Immediately, rumors were flying that the real would depreciate sharply - said to be one of the conditions for receiving a bailout loan. Rumors that central bank governor Gustav Franco will resign have caused panic in the market. The result, of course, was another stock market crash. Within hours, Brazil's stock price index fell by 8.8 points. The country most affected by the Brazilian stock market crash was Argentina, whose stock market also plummeted by as much as 6.55 points.
After the Brazilian Congress rejected the aid agreement, will the Brazilian loan that was successfully negotiated also fail? Fortunately, the International Monetary Fund approved a three-year loan of US$18.1 billion to Brazil on December 2, 1998. Thanks to the efforts of the Brazilian government, the International Monetary Fund and investors have gradually trusted Brazil.
This time politicians have confirmed how slow and incompetent they are in dealing with the ever-changing situation in the capital market: In mid-January 1999, the former president of Brazil, the new Minas-Guerre, Itmar Franco, the governor of Gouverneur von Minas Gerais, requested a moratorium on repayments of his state's borrowings from the federal government. For the federal government, $90 billion in borrowing suddenly became a problem. Will other states follow suit? First, Congress rejected the aid agreement, and now the state of Minas de Grace has postponed its debt repayments. Then other states may continue to follow suit: Are all the efforts of the Brazilian government to consolidate finance in vain? There is a strong atmosphere of unease hanging over the market. On January 12, 1999, Brazil's Bovesta index fell as much as 6.54 points at the opening, and dropped even further by 7.62 points at the close, closing at 5916 points.
Fifteen minutes after the opening of the next day, the market fell by more than 10.23. On the same day, the Central Bank of Brazil adjusted the exchange rate floating range originally set at 1.12 to 1.22 to 1.2 to 1.3; however, the depreciation of the Brazilian currency, the real, was still as high as 8. At the close of trading, 1 U.S. dollar was exchanged for 1.32 reais. At this time, Brazil's foreign exchange reserves were only $35 billion. By Friday, January 15, 1999, the central bank decided to let the real float. So from January 15th to May 7th, the real depreciated by nearly 70%. Speculators who have a thorough understanding of the incompetence of Brazilian politicians and the plight of Brazil's economy will surely be able to make a fortune as long as they take advantage of the real's collapse.