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For IMF, Brazil's 51.5% Debt/GDP Ratio is Too High |
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Written by Stênio Ribeiro
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Friday, 02 December 2005 |
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The ratio between Brazil's debt and its Gross Domestic Product (GDP), the total wealth produced by the country, is "very high," according to the the deputy managing director of the IMF.
International Monetary Fund director Anne Krueger, who is in Brazil for the first time in two years, paid a visit to the Brazilian Ministry of Finance, where she gave an interview. The country's debt/GDP ratio currently stands at 51.5%. This means that more than half of what the nation produces would be necessary to repay what the government owes. Krueger said that one way to solve this problem is for the federal government to continue its fiscal adjustment policy. She also defended the primary surplus, that is, government spending cuts to cover interest payments on the debt. Krueger believes that, in the long run, this policy will reduce the country's debt. According to her, the countries with the best growth in the past ten years are the ones that achieved substantial reductions in their debt/GDP ratios. ABr
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but if someone like the Brazilian government decide to put interest rates at 16 to 19 % when inflation is only around 6 or 7 % %, They must over borrow by 10 to 13 % .
Knowing that every country borrow more and more year after year even after inflation, Brazil debts increase by around 25 % or so annually. Increasing debts at such a fast speed cannot last very long without having a major problem sooner rather than later !
And Brazil do that during an economic boom. What will happen on the next economic slowdown or worse in the nest recession. Debts will increase at even a faster speed resulting in inflation, unemployment, currency devaluation as more borrowing will have again to be made in foreign currency as you did in the past. Things you know better than anybody else, during the early 90's.
Even worse, EVERY country that borrows heavily in foreign currencies, one way or the other, has a major problem.
NO government in developped nations borrow in foreign currencies.
And with all due respect to Mrs Krueger, most developed nations have a higher ratio of debt to GDP. The problem is elsewhere.
If a country has a debt/GDP ratio of even 100 % and 2 % inflation but borrows at let say 5 %, it costs 3 % of the GDP after inflation for interests payments..
ACCEPTABLE.
If Brazil has a debt/GDP ratio of 50 % and 6 % inflation but borrows at 18 %, it costs
6 % of the GDP after inflation for interests payments.
TWICE AS MUCH.
THE AMOUNT of money owned is only secondary knowing that governments in 99 % of the time never reduce the total debts owned but increase them consisently year after year !
Therefore the rate of growth of the debts and the rate of interests after inflation are far more important than just the percentage of debt/GDP ratio.
Having the world highest interet rates after inflation and a fast speed in new debt growth does not put Brazil in good shape.
Your debt/GDP ratio PRINCIPALLY skyrocketed first up during the 1980's and 90's because of your multiple currency devaluations and foreign currency borrowings AND LATER CAME down in the last three years PRINCIPALLY because of your currency revaluation !
If yuu had a much better tax collection, interests rates would not need to be that high as the government would have more money for the necessary spending.
Also with a better tax collection, more could be done for education, healthcare, infrastructure and with a lower borrowing cost you could reduce your very high taxes by stimulating investments in the economy that will provide new jobs. A reduction in interest rates AND tax rates will provide, curiously enough, more inestments, more jobs, more profits AND more money to the government.
REAGAN DID IT FIRST. THE USA CAME OUT OF A LONG AGONY THAT LASTED 15 YEARS (1968-1982).