Brazil moves to woo IMF, Washington after currency devaluation

The talks come after Brazil on Friday stopped defending its cherished currency and floated it on world markets to avert a Russia-style financial collapse, which some feared would have reignited world economic turmoil.The real closed off 8 percent from Thursday at 1.43 to the dollar.

It was a painful loss in spending power for 160 million Brazilians, but the decision to abandon the inflation-busting backbone of its five-year economic programme did not amount to the economic meltdown some had dreaded.

Dollar outflows, which reached nearly $2 billion on Thursday, slowed to $300 million, traders said.Shares in Sao Paulo soared more than 30 per cent, wiping out much of recent losses on relief that Brazil had given up its potentially crippling fight against the market.

US stocks and the dollar, which dipped this week on fears that a crisis in Brazil could hurt hefty US exports to Latin America, posted strong gains. European share and emerging market currencies also rose.

In September, Brazil narrowly avoided a devaluation after the Russian economic collapse when the IMF and other lenders rustled up a $41.5 billion bailout package. Terms of the deal did not contemplate a free float of the real.

But top industrial nations said devaluation left Brazil with no choice but to finally tackle the overspending that whittled away at investor confidence and led to severe capital flight. And US Treasury Secretary Robert Rubin said more aid for Brazil is not the answer.

"I don’t think the issue lies there," he told reporters in New York.Officials from other Group of Seven industrialised nations, meeting inFrankfurt on Saturday, also played down chances Malan and Lopes would win new pledges of cash. Camdessus cancelled his trip to FrankfurtEconomists said they expected the talks with the IMF and the US Treasury to be more an act of atonement for having sprung the changes on them with little advance notice.

The IMF said it had been consulted about Brazil’s decision to stop defending its currency through dollar sales. But economists said an initial controlled devaluation on Wednesday of 8 percent was a bit of a surprise.

"What they are hoping to do is to explain to the IMF and the treasury what they did this week and basically try and maintain the disbursements (of the rescue package) or even speed them up," said Carl Ross, managing director of Latin American sovereign research for Bear Stearns.

"It’s a little hard for me to imagine they will get a very warm reception." Five years ago, Brazilians lived in a surreal economic world where inflation reached more than 2,000 per cent a year.

Many still recallchaining three shopping carts together at supermarkets to buy food for a month, needing fistfuls of bank notes to pay a bus fare and stuffing a few precious dollars under mattresses.

The economic stability programme known as the Real Plan, drawn up in 1994 while current President Fernando Henrique Cardoso was finance minster, put a stop to all that. Anchored on a strong currency and high interest rates, the Real Plan brought inflation down to zero last year, restoring the pride of Latin America’s industrial powerhouse and allowing Brazil to feel it might fulfill its destiny as a world power.

But investors who had begun to pour billions of dollars back into the country’s economy over the past three years were spooked by Financial crises that swept through Asia and Russia last year.

And Brazil, with an economic policy mix of a strong currency, high interest rates, and a towering debt, became a source of concern that it would be the next big economy to collapse.