Brazil's Economic Crisis

Brazil Economic Crisis

Brazil Crisis that started on 1998 was a major downturn to Brazil’s economy and trade. One of the 8^th largest economies in the world is facing an economical meltdown due to a virus that might affect their currency. The devaluation of currencies against US dollar around Mexico, China and many more, the Brazilian real have been put in a difficult situation with little choices to restructure the economical forms.  People believe the new president Fernando Henrique Cardoso is the right man in the right place, his plan was to apply structural adjustments and economic reforms to satisfy the conditions set by the International Monetary Fund (IMF) for a $41.5 billion loan. This was one of his major plans to back up the reserve, prevent capital flight, and protect Brazil real from depreciating. Brazil had to support the foreign direct investment and create more attractive conditions for investors and exporters. The IMF didn't approve the loan so Brazil had to find a backup plan to save the currency and most important the economy overall. Cardoso increased taxes and decrease spending to get the support from the IMF, at the end of the day Cardoso was unable to deliver. Investors and Citizens realized that real is losing value, so they started shifting their wealth out of Brazil and into bank and brokerage accounts in the U.S., Europe, and off-shore financial intermediaries.

Central Bank of Brazil had to take action to save the future of Brazil’s economy, they increased 50% of interest rates to encourage saving and prevent capital flight and rebuild trust in investors. But still it wasn’t a good solution to stop the crisis and prevent the real to devalue. The solution came in 1999, where Brazilian government has decided to float the real against the dollar. It solved some structural issues and restored the trust in investors and the currency is exposed and influenced by foreign exchange market.

References:

• Briefing on Brazil's economic crisis, https://www.mtholyoke.edu/courses/sgabriel/brazil.htm, Accessed on 2-12-2012
• The Brazilian economic crisis, http://www.twnside.org.sg/title/brazil-cn.htm, Accessed on 1-12-2012