Brazil rescue in doubt

DOUBTS loom over the rescue of Brazil's economy despite an International Monetary Fund announcement last week that it has reached a preliminary agreement on a package with the Brazilian finance minister, Pedro Malan.

According to an IMF official who attended a briefing given by the Fund's first deputy managing director, Stanley Fischer: "The detail doesn't exist."

The announcement, issued jointly by the IMF and Brazil, reassured investors fearful that the country will fall victim to emerging market debt contagion. But bankers warned that if the preliminary agreement is not finalised, the dashing of raised hopes could spark investor panic in Latin America.

Markets are now focused on the second round of Brazil's national elections due on 25 October. Reform-minded President Fernando Henrique Cardoso won re-election last Sunday, but it remains to be seen how his allies do.

Mr Cardoso faces the task of chopping the government's 7 per cent budget deficit, and adjusting the 15 to 40 per cent over-valuation in its currency, despite the fact that official unemployment stands at 8 per cent, and estimated unemployment in the slums of Rio de Janeiro and Sao Paolo is much higher.

Markets are also focused on the size of the bailout. Investor expectations swing widely from $30bn to $50bn (pounds 17bn to pounds 30bn). A US source expects a package "well north of $30bn, maybe over $40bn".

But The Independent has learned that the IMF, World Bank, and Inter-American Development Bank together can currently allocate only $23bn.

The dometic treasuries of the G7 are likely to kick in extra funds, but it remains to be seen how much and whether it will be hard or soft loans.

Insiders are looking for at least a $2bn contribution from private lenders, who may also be asked to roll over maturing loans. But private bankers were put off by an autocratic presentation by Mr Fischer at a private dinner a fortnight ago, according to a banker familiar with the situation. A follow-up dinner presentation to US private bankers by a Brazilian official that was scanty on details also left a poor impression.

The global context in which Brazil's potential debt crisis is unfolding continues to deteriorate. The US Congress looks set to approve $17.9bn in fresh funds for the IMF this week, triggering a total replenishment of funds from all IMF members of $90bn.

But the collapse in US and European government bond prices on Friday, and the record fall of the dollar against the yen last week, indicate that the mood of international investors and bankers is close to panic. "Anything less than $30bn in real money [for Brazil], and the markets may go crazy," warned a Wall Street executive.