`Asian contagion' brings Brazilian austerity

On November 10, Brazilian President Fernando Henrique Cardoso announced a package of 51 austerity measures to shore up the real, the dollar-backed currency he designed in 1994 when he was finance minister.

The real's success in curbing inflation is credited with Cardoso's victory over Luis Inacio Lula da Silva of the leftist Workers Party (PT) in presidential elections in October of that year.

The austerity plan is expected to save the government US$20 billion by laying off 33,000 federal government temporary workers, freezing government workers' salaries in 1998, raising the income tax 10% for two years and raising taxes on petrol, cigarettes and alcoholic beverages by 5%.

The new measures followed dramatic declines in Brazilian stock markets set off in late October by the south-east Asian financial crisis and the October 30 decision by the Brazilian Central Bank to double interest rates to more than 40%. The markets fell again by about 6% on November 7, precipitating the announcement of the austerity plan.

``We are very worried that these measures, along with the increase in the interest rates ... will create recession and constrain the economy'', said Horacio Lafer Piva, vice president of the Sao Paulo Federation of Industries.

Brazilian stocks were hit again on November 12, the Sao Paulo exchange plunging by 10.20% and the Rio de Janeiro market by 10.18%.

``Asia is much worse than people think'', said David Shulman, chief equity strategist at Salomon Brothers in New York, ``and the Asian contagion has moved to Brazil.''

[From Weekly News Update on the Americas.]

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