Mark Egan

This selection first appeared in Reuters Market News on September 6, 2002.

WASHINGTON, Sept 6 (Reuters) - The International Monetary Fund on Friday approved a $30.4 billion bailout for Brazil, which is aimed at quelling a crisis of confidence if a leftist wins the October presidential election.

With markets fearing the next president might abandon fiscal discipline and possibly default on the nation's more than $250 billion debt, the IMF announced last month it would support Brazil with its largest loan ever.

The IMF said about $3 billion of the cash is immediately available with another $3 billion available by the end of the year after a review. The rest of the loan will be given in four payments through the end of 2003, pending reviews aimed at ensuring the government maintains sound economic policies.

"Brazil has implemented strong and consistent macroeconomic policies in recent years ... The fund looks forward to working with the incoming government to deepen these structural reforms and entrench sustained growth in Brazil," IMF Managing Director and Chairman Horst Kohler said in a statement.

Earlier this week, Brazil's government pledged to meet a higher primary budget surplus this year to offset its growing debt burden, set to swell further with the fresh infusion of IMF's cash. The government raised its surplus target to 3.88 percent of economic output this year, exceeding the 3.75 percent the IMF had demanded, to reassure investors the nation would take austerity measures to remain solvent.

Typically the IMF tries to avoid lending large sums of money to governments so close to elections. But with Brazil's position growing ever more tenuous, the IMF felt it had little option but to pony up the largest loan in its history.

TARGETS AND CONSEQUENCES

This is not the first time a nation has been showered with IMF cash ahead of an election. In December 1997, at the height of the Asian financial crisis, the IMF led a huge bailout for South Korea just two weeks ahead of a presidential election.

To protect itself from any change in Brazilian economic policy once the new government takes office in January, $24 billion of the cash becomes available next year. In return, the new government must maintain a 3.75 percent budget surplus. If that target is not met, the lender can cut off the government's access to the loan -- a fate that befell Argentina last December with disastrous consequences.

Last month outgoing President Fernando Henrique Cardoso discussed the IMF accord with presidential candidates to try and soothe investors' anxiety over the candidates' proposed policies. The two left-leaning candidates, who are leading in opinion polls, backed the thrust of the IMF accord. Jose Serra, the candidate from the ruling coalition, has strongly endorsed it, but trails front-runner Luiz Inacio Lula da Silva.

The battered real currency has lost a quarter of its value this year and hit all-time lows in July before the planned IMF pact was announced. But markets have remained jittery with the real sliding all week, shedding about 5 percent of its value.

The real remains under pressure as local firms have suffered from a scarcity of credit to back exports amid market turmoil. Despite a promise from major international banks last month to support Brazil, there have been few signs of improved availability of foreign credit for Brazilian companies.

The bailout marks a remarkable fall from grace for a nation the IMF has held up as the poster child for its reform policies. Just one year ago, Brazil inked a $15 billion IMF pact that was intended as a purely precautionary arrangement.

But as the world economy slowed after the Sept. 11 attacks and its own political problems came to the fore, Brazil burned through that credit quickly and was forced to return to the IMF seeking the largest credit the lender has ever extended.

All Material Subject to Copyright