Brazil in the 1997-9 Financial Turmoil

NBER Reporter: Summer 2000

Brazil in the 1997-9 Financial Turmoil

The fourth in a series of country-specific meetings of the NBER Project on Exchange Rate Crises in Emerging Market Countries, directed by NBER President Martin Feldstein and Research Associate Jeffrey A. Frankel, both of Harvard University, took place in Cambridge on April 14 and 15. This gathering focused on "Brazil in the 1997-9 Financial Turmoil," and was organized by Eduardo Loyo of Harvard University and Andres Velasco of NBER and New York University. Like earlier NBER meetings on Mexico, Thailand, and Korea, this occasion brought together academics, individuals representing the country, international bankers, and government officials in the hopes of developing an in-depth understanding of Brazil's economic situation.

The two-day meeting was divided into four sessions. In Session 1, a panel consisting of Edmar Bacha, BBA Securities, Gustavo Franco, PUC-Rio, and John Williamson, Institute for International Economics, discussed the events leading up to the crisis. They asked, for example: Was the cause of real appreciation and disinflation actually inflation inertia or nominal appreciation? How does one choose a gradual realignment strategy, as opposed to a prompt realignment, or a totally fixed exchange rate? What are the costs of realigning slowly, both fiscal and in terms of activity? And, what is the perceived benefit of gradual realignment in terms of avoiding a persistent inflation backlash?

In Session 2, the experts discussed the way that the crisis was managed. The panelists were: Luiz Correa do Lago, PUC-Rio; Peter Garber, Deutsche Bank; and Thomas Glaessner, World Bank. This group focused on the following questions: Was the 1998 impact on Brazil an example of pure contagion? Was the G-7 "playing for time" and did it work? How exposed was Brazil to speculative attacks, compared to other crisis countries? Did it stand a better chance of defending the peg with high interest rates? What was the health of the financial system, the public debt problem at the time, capital account freedom, and what was the "narrow exit door" argument? Would a firmer commitment to a peg have avoided the devaluation? Did Brazil fold under overwhelming external pressure or did it invite the attack with its indecisiveness? What have we learned about the value of "preventive" rescue packages?

In Session 3, panelists Eliana Cardoso, the World Bank, Marcio Garcia, PUC-Rio, and Paulo Leme, Goldman Sachs & Co., considered what fiscal retrenchment would have accomplished in Brazil. They asked such questions as: Was it all a fiscal problem? How does fiscal retrenchment relate to domestic absorption, and to the dynamics of public debt? Could fiscal retrenchment have avoided the devaluation? And, how does public debt management proceed under external speculative pressure?

In the fourth session, Suman Bery of the World Bank, Ilan Goldfajn, PUC-Rio, and Nouriel Roubini, NBER and the U.S. Department of Treasury, described the devaluation and subsequent fallout. They asked: Why has pass-through been so small? Why has the contractionary impact of the devaluation been so small? How fast could interest rates be reduced? Was it worth defending the peg for so long? What would have been the outcome of letting go earlier? And, what impact did the devaluation have on the region?

In addition to these sessions, there was an off-the-record after-dinner presentation by Arminio Fraga Neto, Governor of the Central Bank of Brazil. A summary of the other discussions is available.

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