Brazilian Debt: A Requiem for Muddling Through

This paper investigates the roles played by the global macroeconomic environment and by Brazilian policy in shaping the Brazilian debt crisis, and assesses the prospects for Brazil's sovereign debt after five years of the `muddling-through' strategy. We first examine Brazilian debt from a historical perspective and then consider the experiences of the 1970s. Between 1978 and 1982, Brazil's current account shifted by $13 billion towards deficits. This shift can be explained, for the most part, by the slowdown in exports, increased real interest rates and high real oil prices. Our estimates suggest that between 1978 and 1982, $35 billion (75% of Brazil's total net debt accumulation) can be accounted for by the adverse external environment. We then review the period 1982-7 and highlight four factors which contributed to the failure of the muddling-through strategy: higher than expected real interest rates, the failure of commodity prices to rise from their low 1982 levels, the unexpected difficulties due to the transfer problem, and the diminishing enthusiasm of creditors for the strategy. We conclude by discussing policies which, we argue, would better serve the long-term interests of Brazil and its creditors.