by Michel Chossudovsky, January 1999

Professor of Economics, University of Ottawa, author of The Globalisation of Poverty, Impacts of IMF and World Bank Reforms, Third World Network, Penang and Zed Books, London, 1997. (The book can be ordered from twn(a) )

Copyright by Michel Chossudovsky Ottawa, January 1999. All rights reserved. To publish or reproduce in printed form, contact the author at

This article follows an earlier article by the author (written before the crisis) entitled "the Brazilian Financial Scam", Third World Resurgence, November 1998;

The earlier article on Brazil is available at: )
The Speculative Onslaught: From East Asia and Russia to Latin America

As Wall Street speculators extend their deadly raids, the global financial crisis has reached a new climax. Succumbing to the speculative onslaught, the Sao Paulo stock exchange crumbled on Black Wednesday, 13 January 1998. The vaults of Brazil's central bank were burst wide open; the Real's "crawling" peg to the dollar was broken. Central Bank Governor Gustavo Franco was replaced by Professor Francisco Lopes who was immediately rushed off to Washington together with Finance Minister Pedro Malan for high level "consultations" with the IMF and the US Treasury.

Public opinion had been carefully misled; the "Asian flu" was said to be spreading... The global media had casually laid the blame on Minas Gerais' "rogue governor" Itamar Franco (a former President of Brazil) for declaring a moratorium on debt payments to the federal government. 1 The threat of impending debt default by the State governments was said to have affected Brasilia's "economic credibility".

Brazil's National Congress was also blamed for asking deceptive questions and for not having granted in December a swift and "unconditional rubber-stamp" to the IMF's lethal economic medicine. The latter required budget cuts of the order of 28 billion dollars (including massive lay-offs of civil servants, the dismantling of social programmes, the sale of state assets, the freeze of transfer payments to the State governments and the channelling of State revenues towards debt servicing).

Shuttle Diplomacy

On the weekend of January 16-17th, Finance Minister Malan and Central Bank Governor Lopes were in Washington for high level talks, on Saturday at IMF Headquarters and on Sunday at the offices of the US Treasury. "Some officials in Washington were [at first] outraged by the lack of consultation by Brasilia over the original decision made late on Tuesday [the 12th] to abandon the Real peg given the time and effort put into the original [IMF sponsored] programme [negotiated in November 1998]". 2

IMF Managing Director Michel Camdessus later admitted that "the decision was a wise move to stop the loss of reserves" while emphasising that he expected Brasilia to meet the fiscal targets under the Fund's financial package signed in November. The flexible exchange rate regime was also approved on condition the "extremely high" domestic interest rates remained in force and that no foreign exchange controls be introduced (which might prevent institutional investors from moving their money in and out of the country).

Squeezing Credit

In insisting on tight monetary policy, the Washington based institutions were also intent on destroying Brazil's industrial base, taking over the internal market and speeding up the privatisation programme. The government overnight benchmark interest rate was increased to a staggering 32.5 % (per annum) implying commercial bank lending rates between 48.7 % and 84.3 % per annum. 3 Local manufacturing crippled by unsurmountable debts had been driven into bankruptcy. Purchasing power had crumbled; interests rates on consumer loans were as high as 150% to 250% leading to massive loan default... 4

Endorsement by the Washington Consensus

Barely a few days after Black Wednesday, in a prepared press statement, IMF Managing Director Michel Camdessus welcomed "...the reaffirmation of fiscal consolidation as the foremost priority (...) together with the structural and privatisation measures which are part of the agreed program with the Fund". 5 World Bank President James Wolfensohn and Vice President Joseph Stiglitz – known for his recent critique of the IMF's high interest rate policy in East Asia – also provided their firm backing: "We are pleased with Minister Malan's final account of his Washington meetings, and welcome his invitation to intensify our dialogue." 6

Increase in the Price of Bread

On Monday morning January 18th, the Sao Paulo stock exchange had temporarily recovered, regaining some of its losses. While "confidence" had been reinstated, the Real had lost more than 20 percent of its value in less than week. By late January it had declined by more than 40 percent, leading to an almost immediate surge in the prices of fuel, food and consumer essentials. The price of bread increased immediately by ten percent. The demise of the nation's currency had contributed to compressing the standard of living in a country of 160 million people where more than 50 percent of the population are below the poverty line.

In turn, the devaluation had backlashed on Sao Paulo's Southern industrial belt where the (official) rate of unemployment had reached 17 percent in 1998. In the days following Black Wednesday January 13th, multinational companies including Ford, General Motors and Volkswagen confirmed work stoppages and the implementation of massive lay-offs of workers. 7

Getting the Green Light from Wall Street

After his busy weekend schedule in Washington, Finance Minister Malan hurried to New York for an early morning encounter (Wednesday the 20th of January) at the Federal Reserve Bank: on "the breakfast list": Quantum Hedge Fund George Soros, Citigroup Vice-President William Rhodes, Jon Corzine from Goldman Sachs and David Komansky of Merrill Lynch. 8

This private meeting held behind closed doors with Brazil's "creditors of last resort" was crucial: Rhodes had headed the New York Banking Committee on behalf of some 750 creditor institutions; he had first dealt with Fernando Henrique Cardoso (when he was Finance Minister) to negotiate the restructuring of Brazil's external debt under the Brady Plan. 9 The latter coincided with the launching of the 1994 Real Plan on behalf of creditors and speculators. The pegged exchange combined (with the structure of high interest rates under the Real Plan) served to boost the internal debt from 60 billion in 1994 to more than 350 billion in 1998...

Although the results of the breakfast meeting were not made public, Bill MacDenough of the Federal Reserve Bank (who had carefully organised the event), confirmed that Brazil's external and internal debts were considered to be within manageable limits: "it is not necessary [at this stage] to reschedule Brazil's external debt". 10 Caving in to his Wall Street masters, Finance Minister Malan fully acquiesced: there will be "no renegotiation" nor debt forgiveness for Brazil... 11

Background of the IMF Agreement

At first sight, the plight of Brazil appears as a standard "re-run" of the 1997 Asian currency crisis. The IMF's lethal "economic medicine" is broadly similar to that imposed in 1997-98 on Korea, Thailand and Indonesia. Yet there was a striking difference in the "timing" (ie. chronology) of the IMF ploy: in Asia, the IMF "bailouts" were negotiated on an ad hoc basis "after" rather than "before" the crisis. In other words, the IMF would only "come to the rescue" in the wake of the speculative onslaught, once national currencies had tumbled and countries were left with unsurmountable debts.

In contrast, in Brazil the IMF financial operation was negotiated "before" as part of a new standing IMF-G7 arrangement. The "economic medicine" was meant to be "preventive" rather than "curative". Officially it was intended as a means to "prevent the occurrence" of a financial disaster. Moreover, the money under the preventive scheme was made available "upfront" "before" (rather than in the wake of a currency devaluation).

Preventive Economic Medicine

This "preventive scheme" announced by President Clinton was launched in late October. the leaders of Group of Seven nations had agreed "to help economically healthy nations" stave off the dangers of currency speculation. A multi-billion dollar "precautionary fund" had been set up. Its stated objective was to prevent the "Asian flu" from spreading to other regions of the World... 12.

Brazil was first in line under the IMF-G7 scheme: part of the money had already been earmarked to support President Fernando Henrique Cardoso's "efforts at stabilising" the Brazilian economy. Barely two weeks later on November 13th, the government of Brazil submitted its "Letter of Intent" addressed to the IMF Managing Director Michel Camdessus. Attached to the letter was the "Memorandum of Economic Policies" carefully drafted in the usual economic jargon in conformity with IMF guidelines.

Detailed negotiations on a multi-billion dollar package (equivalent in real terms to "half a Marshall Plan") had been carried out. Already in July 1998, Washington had instructed Brasilia not to tamper with the rules governing the multi-billion dollar futures and options trade on the Sao Paulo exchange: "temporary exchange controls would have defused the situation, but that is a no-no in the IMF's books, because it would undercut the lucrative games of international finance..." 13

Lucrative?... The sheer magnitude of the money appropriated is mind-boggling: during a 6-7 month period (July 1998-January 1999) 50 billion dollars of foreign currency reserves (largely transacted through BOVESPA options and futures contracts) had been appropriated by private financial institutions. Equivalent to 6 percent of Brazil's GDP, the money confiscated through capital flight was to be "lent back" to Brazil in the context of the 41.5 billion dollar operation...

"Up Front Fiscal Adjustment"

In constant liaison with Brazil's Wall Street creditors, the main Washington actors of this multi-billion dollar ploy were First Deputy Managing Director Stanley Fischer at the IMF and Deputy Secretary Lawrence Summers at the US Treasury. The World Bank, the Interamerican Development Bank (IDB) and the Bank for International Settlements (BIS) were also involved in putting the financial package together.

Imposed by Brazil's creditors, the IMF programme was to include:

"a large up-front fiscal adjustment of over 3 percent of GDP with reforms of social security, public administration, public expenditure management, tax policy and revenue sharing that confront head-on the structural weaknesses that lie at the root of the public sector's financial difficulties". 14

Finishing touches to the multi-billion scam were completed at IMF Headquarters in Washington in the night of November 12th; the agreement was formally announced by the IMF Managing Director Michel Camdessus the following morning in a press conference:

"I believe that the soundness of Brazil's program and the authorities' commitment to it together with the strong support demonstrated by the official international community provide the conditions for Brazil's private creditors now to act to help ensure its success". 15

And who were these private creditors "helping to ensure its success"? The same Wall Street financiers (and their affiliated hedge funds) involved in the speculative onslaught against the Brazilian Real...

The IMF Agreement Contributes to Fuelling Capital flight The 41.5 billion dollar financial package was intended to "restore confidence". However, rather than staving off the speculative onslaught, the IMF sponsored rescue operation contributed to accelerating the outflow of money wealth. Twenty billion dollars were taken out of the country in the two months following the approval of the IMF precautionary package: an amount of money of the same order of magnitude as the massive "up-front" budget cuts required by the IMF.

Marred by capital flight, Brazil's money wealth was being plundered: in the months preceding the January financial meltdown, the outflow of foreign exchange reserves was running unabated at a rate of 400 to 500 million dollars a day... Capital flight during the first two weeks of January was of the order of 5.4 billion dollars (according to official sources).

Enticing Speculators

The IMF sponsored operation was largely instrumental in enticing speculators to persist in their deadly raids; "The money was there" to be drawn upon. If the Central Bank of Brazil were to contemplate defaulting on their foreign exchange contracts, the availability of IMF-G7 money "upfront" financing would enable banks, hedge funds and institutional investors to swiftly collect their multi-billion dollar loot. The IMF programme signed in November thereby contributed to reducing the risks and "reassuring speculators" that the Central Bank would uphold the Real.

Moreover, if central bank reserves were to bottom out, the authorities would have immediate access to the first tranche (9 billion dollars) of the IMF rescue package to meet their forex contracts. In the words of IMF Deputy Managing Director Stanley Fischer:

"Because you want to provide reassurance to the markets that you're not sort of slicing it very, very thin. You want the markets to know there is a sufficient amount [of foreign exchange reserves in the Central Bank of Brazil] available comfortably". 16

Declining Central Bank Reserves

From 75 billion dollars in July 1998, central bank reserves dwindled to 27 billion in January 1999. The first tranche of the IMF loan of more than 9 billion dollars had already been squandered to prop up Brazil's ailing currency; the money was barely sufficient to "finance the flight of capital" in the course of a single month.

"As it is the $41.5 billion of foreign currency that the IMF marshalled to back Brazil's currency, was doomed to end up with the speculators, leaving Brazil with its foreign currency debt increased by that amount. So often has this scenario been played out (...) of other currencies kept at artificial heights with interest rates, that by now the ploy should be known to schoolboys. The government whose currency is attacked draws on foreign loans arranged by the IMF, and turns over the foreign currency to buy back its own paper. The "assisted" country ends up with the foreign debt to the amount of the "aid" while the speculators pocket the proceeds of the loans, and move on to the next replay of the scam." 17

Hidden Agenda

In the above scenario, the approximate "timing" of the devaluation was part of the IMF ploy; by ensuring a stable exchange rate over a 60 days period (13 November 1998-13 January) it had allowed speculators to swiftly cash in on an additional 20 billion dollars...

In this regard, the IMF had insisted that Brasilia maintain the stability of the exchange rate as part of the agreement signed in November. Capital flight had been speeded up after the November 1998 agreement; both Wall Street and the Washington institutions knew that a devaluation was imminent and that the IMF-G7 sponsored preventive package was nothing more than a "stop gap measure".

In other words, the IMF programme under the "preventive" fund enabled currency speculators "to buy time". The Central Bank was "to hold in" as long as possible. The hidden agenda was to trigger financial collapse; Wall Street knew it was coming... The economic team at the Ministry of Finance was said "to be taken by surprise" but they knew all along that the devaluation was coming... In January, the IMF agreed to let the currency slide. By that time it was too late, Central Bank forex reserves had already been ransacked...

Collapse of the Real

In the wake of the January crisis, the IMF had wisely recommended a 20 billion dollar "floor" for Central Bank Reserves. (Reserves were at 75 billion dollars six months earlier). The setting of a "floor" – decided by the IMF rather than by the Central Bank – played a key role in fostering capital flight in the immediate wake of the devaluation: the pillage of forex reserves was to continue unabated until the "floor" was hit. Also in January, the IMF had promised to release a second 9 billion dollar tranche, with the added advantage to speculators of comfortably "uplifting" forex reserves significantly above the 20 billion dollar floor.

"A Marshall Plan for Creditors and Speculators"

In other words, this fresh gush of IMF-G7 bailout money was meant to replenish Central Bank reserves ("on borrowed money") with a view to encouraging a renewed wave of capital flight. The IMF Managing Director Michel Camdessus (who certainly knew what was coming) had already confirmed in November 1998 that "if the Brazilian authorities have a need for [additional financial] resources ... [they] could have access to that second tranche much earlier, as early as about the turn of the year." 18. Ironically, that was precisely the time at which the Real-dollar peg broke down...

The IMF's presumption was (both prior and in the wake of the devaluation) that the Central bank should continue to sell its forex reserves... And with more IMF-G7 (borrowed) money coming into the coffers of the central Bank, in all likelihood capital flight will continue in the months ahead despite the 20 percent January devaluation of the Real... Very lucrative: in the week following the financial meltdown of January 13th, capital outflows were already running at 200 to 300 million dollars a day. 19 And Finance Minister Pedro Malan had agreed at his Wall Street breakfast meeting with George Soros and William Rhodes (January 20th) that no controls or impediments on the movement of money would be introduced...

Towards an Inflationary Spiral

A deadly economic process had been unleashed: the devaluation had triggered an inflationary spiral which had contributed – alongside the application of massive austerity measures – to brutally impoverishing all sectors of the Brazilian population including the middle class.

Historically in Brazil under a flexible exchange regime, wages had been adjusted on a monthly basis in accordance with increases in the cost of living. The plight of Brazil today, however, differs markedly from the inflationary environment prevailing in the period prior to the 1994 Real Plan.

In the present situation, the IMF agreement signed in November explicitly required the deindexation of wages as "a means of combating inflation". In the IMF book, increased wages are viewed "as the main cause of inflation". Similarly, the authorities have justified the increased levels of unemployment ("a necessary evil") on the grounds that increased unemployment is an effective means of dampening inflationary pressures.

In other words, after having unleashed a fatal inflationary spiral through currency devaluation, the IMF was demanding the adoption of a so-called "anti-inflationary programme". The latter, rather than addressing the causes of inflation, constituted a coherent framework for rapidly laying off workers and compressing wages (through deindexation).

Moreover, under the IMF agreement, monetary policy in the hands of Wall Street creditors, who have the ability to freeze State budgets, paralyse the payments process including transfers to the State governments and thwart (as in the former Soviet Union) the regular disbursement of wages to public sector employees including several million teachers and health workers.

"Programmed Bankruptcy"

"The programmed bankruptcy" of domestic producers has been instrumented through the credit squeeze (ie. extremely high interest rates), not to mention the threat by Finance Minister Pedro Malan to allow for trade liberalisation and (import) commodity dumping with a view to "freezing price increases" and obliging domestic enterprises "to be more competitive". 20 Combined with interest rates above 50 percent, the consequence of this policy for many domestic producers is tantamount to bankruptcy, – ie. pushing domestic prices below costs...

In turn, the dramatic compression of domestic demand (ie. resulting from increased unemployment and declining real wages) has led to a situation of oversupply and rising stocks of unsold merchandise...

This ruthless demise of local industry – engineered by macro- economic reform – has also created an "enabling environment" which empowers foreign capital to take over the internal market, reinforce its stranglehold over domestic banking and enable it to pick up the most profitable productive assets at bargain prices...

In other words, the financial crisis (evolving from the inception of the Real Plan in 1994) has created conditions which favour the rapid recolonisation of the Brazilian economy. The depreciation of the Real will speed up the privatisation programme as well as depress the book value (in Reales) of State assets. The IMF's "up- front fiscal adjustment" – combined with mounting debt and continued capital flight – spells economic disaster, fragmentation of the federal fiscal structure and social dislocation.

Implications for Latin America

The Brazilian financial meltdown has far-reaching implications for Latin America as a whole where heavily indebted countries have been crippled by macro-economic reform for more than fifteen years.

In this regard, the financial crisis creates an environment which strengthens throughout the region, the stranglehold of Wall Street creditors over monetary policy under the stewardship of the IMF.

In Argentina, the demise of the central bank is already firmly in place under the "currency board" arrangement. The latter is essentially a colonial-type banking system. Since the Brazilian financial crisis, discussions are underway in Buenos Aires towards the replacement of the Argentinian peso by the US dollar, implying not only the complete control over money creation by external creditors but also the printing of banknotes by the US Federal Reserve (which is controlled by a handful of private US banking institututions).

Following the Argentinian model, other countries may wish to follow suit, viewing the replacement of their national currencies by the US dollar as a way of avoiding a financial crisis.

However, in all likelihood the "dollarisation" process (under the Washington Consensus) will be instrumented through speculative attacks which significantly depress the value of national currencies against the dollar (ie. in anticipation of negotations concerning the replacement of those national currencies by the US dollar).

Disarming the Neoliberal Agenda

"Economic crimes against humanity"?... Those responsible in Brasilia, Washington and New York should not be allowed to walk away as if did not know... The monetary authorities of G7 nations and fourteen other countries co-financed the IMF sponsored scam (through the Bank of International Settlements). The governments were fully aware of the implications of the IMF loan agreement. They bear a heavy burden of responsibility in endorsing a multi- billion dollar scam conducive to the brutal impoverishment of the Brazilian people.

While the international community stands reluctant to disband the Washington consensus and disarm financial markets, there are indications that similar speculative assaults are to be launched in other countries in Latin America, Asia and the Middle East with devastating economic and social consequences.


1. A 90 days moratorium was declared. See Financial Times, London, January 18, 1999, p. 4.

2. Ibid.

3. Official figures, see Estado de Sao Paulo, 21 January 1999.

4. Wall Street Journal, New York, 6 January 1999.

5. IMF News Brief No 99/3, Washington, 18 January 1999).

6. World Bank News Release, Washington, 18 January 1999.

7. See Larry Rohter, Crisis Whipsaws Brazilian Workers, New York Times, January 16th, 1998.

8. Estado De Sao Paulo, 21 January 1999.

9. See Michel Chossudovsky, The Globalisation of Poverty, Impacts of IMF and World Bank Reforms, Third World Network, Penang and Zed Books, London, 1997, p. 182.

10. Estado De Sao Paulo, 21 January 1999.

11. Ibid

12. For further details see Michel Chossudovsky, the G7 "Solution" to the Global Financial Crisis : A Marshall Plan for Creditors and Speculators, Ottawa, 1998.

13. Wall Street Journal, 6 January 1999.

14. IMF Press by Michel Camdessus and Stanley Fischer, Washington, November 13, 1998. See also "Letter of Intent" and "Brazil: Memorandum of Economic Policies", IMF, Washington, 13 November 1998.

15. IMF Press Conference, op cit

16. Ibid

17. Wall Street Journal, op cit.

18. IMF Press Conference, op cit.

19. Estado de Sao Paulo, 21 January 1999.

20. The underlying "model" is that of the Ukraine where under IMF advice (1994) US grain surplus were dumped on the domestic market with a view to stabilising domestic prices but with the ultimate effect of destroying domestic producers.

Michel Chossudovsky
Department of Economics,
University of Ottawa,
Ottawa, K1N6N5
Voice box: 1-613-562-5800, ext. 1415
Fax: 1-514-425-6224

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