Brazil's current conditions
The Real, was introduced as a new currency to discourage inflation. No use of price controls or price freezing, were needed The real plan used a combination of domestic, monetary anchors with external ones. The monetary anchors were influenced by higher interest rates and appreciated exchange rates.in conjunction with the Real Plan, which is in contrast with previous failed plans. A gradual depreciation of the currency was used to stimulate economic activity. At the launch of the real plan interest rates dropped to 22%! Interest rates have continued to stay below 10% since 1996. This reduction of interest rates has expanded economic activity.
In 2002 problems have occurred in the domestic financial market, public debt management, and a steep decrease in foreign credit flows. These problems are associated with the confidence crisis. This has negatively affected the inflation and the level of activity. The shock of the confidence crisis was felt much larger than expected by Brazil.
Graph: Exchange rate depreciation and Inflation in 2002(will have Ryan do)
To overcome this shock the goal of the monetary policy in 2003 is to continue a path back to that of the previously given, Real Plan, but adjusting the targeted goals over a longer period of time..
To maintain this plan in the future, objectives for the Real Plan include: inflation on a downward trend, long-term sustainable growth in output, investment, and employment and productivity, and a steady and substantial reduction of social imbalances.
The Future
Brady Bonds
To better Brazil’s current and future debt Brady bonds are being used. Brady bonds are a system of dept relief by swapping old loans for new loans. The Brady Plan was introduced in 1989 by Nicholas Brady. The plan consisted of asking banks to forgive part of their loans to debtor countries in return for limited guarantees of repayment. These would be financed by the World Bank and the IMF. To partake in this, debtors would be required to participate in policies favoring private investment. Brazil’s Central Bank was involved in the Brady plan. In 2001 they found $18.3 billion in outstanding bonds that would be eligible for the swap. These new loans would mature in 2024.
IMF
In 1998 Brazil was handed $41.5 billion as a life-preserver. They failed to use this money to the best of their advantage causing a confidence crisis. In August 2002, Brazil was given $30 billion from the IMF to get them back on their feet and improve confidence in the markets. This is the last of the money the IMF said they would give Brazil until they can take control and stabilize themselves. To exercise future use of the IMF stabilization needs to occur in the areas of: inconsistent currency management, accounting and reserve management, and poor debt management.
Projections
Conclusion
Bibliography