Outlook: Dose of reality makes IMF look silly

WHAT DOES the Brazilian crisis mean for Western markets? Its most obvious lesson is the same as that of the Asian and Russian crises - that pouring billions of dollars of International Monetary Fund aid into these countries is an entirely pointless and largely inappropriate policy response.

On all three occasions the money has ended up going full circle; the capital injection has helped finance a massive capital withdrawal. Far from supporting these countries in their hour of need, it has merely gone towards bailing out Western creditors. Plainly this is not a good use of taxpayers' money.

In the case of Brazil, the lesson is a doubly poignant one, as parts of the Group of Seven - mainly Germany, backed to some extent by Britain - opposed the package on precisely these grounds: that private, mainly Western, creditors were taking none of the pain. It was the US, whose banks and companies have most to lose from a Latin American meltdown, that bulldozed the proposals through.

In effectively devaluing the real, Brazil has acted unilaterally. So, despite their assistance, the IMF and the Federal Reserve are no longer in control of the process and therefore end up looking even more silly than they did before. The IMF was never intended as a mechanism for refinancing Western creditors and markets, but that is what its purpose seems to have become. As first Russia and now Brazil have shown, the IMF cannot even expect these countries to stick to their side of the bargain nowadays. The IMF has become a laughing stock, and an easy touch at that.

The Brazilian crisis, then, has once again highlighted the inadequacies of the international safety net operated by the IMF. A safety net for who? The developing world, or the West?

On the other hand, at this stage the Brazilian crisis doesn't appear as serious as Russia or Asia. This is partly because it was so well anticipated, so there is a certain "yawn, here we go again" inevitability about it. That Western stock markets should have been badly hit by yesterday's devaluation was therefore something of a surprise.

To the extent that Western creditors and banks haven't covered their exposure to the region by trousering the IMF's money, they may have already largely provided for it. Furthermore, if the Brazilian government can push through its proposed austerity package, it may be able to hold the devaluation within the limits set yesterday. The free fall in the value of the currency that occurred in the Far East and Russia might be avoided.

On the negative side Brazil, and possibly the rest of the region too, are now almost certain to sink into recession. That makes the US's position as what Lombard Street Research pointedly calls "consumer of last resort" even more vital to maintaining the overall health of the world economy.

Obviously Wall Street valuations are looking more and more difficult to justify, but as long as interest rates keep falling, flooding Western markets with liquidity, the moment of truth gets postponed. The bears may have to wait a little bit longer yet to be proved correct.