The International Monetary Fund may soon arrange a multibillion-dollar standby credit facility for Brazil in which U.S. and foreign commercial banks would be asked to participate, the Washington-based international lending agency has announced.
A joint statement released in Washington by Brazil and the IMF gave no details on how much might be made available. However, bankers estimated that Brazil would need up to $30 billion to meet its foreign currency obligations through yearend.
"IMF funding is absolutely critical for Brazil," said Christian Stracke, Latin American economist at Bankers Trust Corp. "There's really no way Brazil could get through the next six months without IMF funding unless the world economy reverses itself so thoroughly that private liquidity could start flowing back into Brazil."
Bankers said a standby facility could help slow capital flight from Brazil and prevent the current global financial crisis from spreading into Latin America. But they also noted that foreign capital flows and bank loans to Brazil are unlikely to resume until it adopts a credible program to reduce its large budget deficit.
"A package would be nice, but things are very much in the hands of the Brazilians," said David Sekiguchi, an emerging market debt strategist at J.P. Morgan & Co.
"If they deliver a fiscal surplus of 2.5% to 3% of gross domestic product," he said, "they have a good chance of avoiding any collapse."
Discussion of a Brazilian emergency financial package came after recent moves by Argentina to set up a $6 billion standby facility, including nearly $1 billion from foreign and local banks, and by Mexico to draw down a $2.6 billion credit facility from foreign banks.
U.S. banks, which had more than $27 billion of cross-border exposure to Brazil at March 31, are particularly worried that South America's largest country might halt or postpone payment on its foreign debt.