Transcript of a Press Briefing by Guido Mantega, Finance Minister of Brazil and Chairman of the G-20

Washington, DC, October 11, 2008

Note: this transcript is based on the English interpretation of the briefing, conducted mostly in Portuguese. Webcast available.

The Chairman of the G-20 (Mr. Mantega) - The meeting of the G-20 was very important. The G-20 brings together both developed and developing countries. Today we are facing a financial crisis on a global scale that is affecting almost all countries in the world. As the crisis has been aggravated and has gone into a more acute stage now, it is having impacts for developing countries as well.

So, the thesis that there would be no spillover is no longer valid. There are now major impacts and influences of the crisis which began in advanced countries whose epicenter is the United States and Europe. It now has migrated into emerging markets. We are now facing a worldwide crisis which must be dealt with by all governments, by all states.

We see that the G-7 has moved to deal with European problems like the U.S. has done, which made a proposal to deal with the problems of the bad assets in financial institutions and banks. I would say that the G-20 today took steps toward more coordinated action, more in tune with each other. We want to raise these issues in the G-20 so that it can also coordinate with the emerging countries who are a major part of the problem and of the solution, of course.

The G-20 was not created to face this kind of situation. When the G-20 was thought up back in 1998, shortly after the crisis in Russia, its objective was to be more a discussion forum dealing with deep-seated problems affecting many countries. So, its makeup does not really allow it to act in a decisive fashion on economic issues. The Ministers meet only once a year, in November every year, and throughout the years it is the Deputies who have meetings. So, there is no agile structure prepared to deal with emergency economic problems. That is what we have seen at this time.

We realized now that the advanced countries do have institutions that carry out that role such as the G-7, which comes together; in recent weeks it met twice. Tomorrow President Sarkozy has called a meeting of all countries of the European Union.

However, our emerging countries do not have the right kind of fora. The G-20 could do it, but not this G-20 we have. We have to turn this G-20 into a forum or a tool of some kind that can provide answers to immediate problems and coordinate its actions better amongst many countries.

We are facing the most serious financial crisis perhaps since the crisis of 1929, and as this crisis is getting more serious it demands quick answers, immediate answers. It must be monitored day by day, hour by hour, so that the necessary measures can be taken to handle the problems that arise. So, there must be very agile instruments available for that to happen.

So, it was my proposal that we rethink the G-20 in light of the new needs that have been raised by the current situation. We will have a meeting in November in Sao Paulo, and in the coming months we will have time to think about a new make-up for the G-20. As a more agile institution, it could be more present in dealing with day-to-day problems facing countries.

It will be fundamental in dealing with this kind of a crisis, with problems that are common to many different countries, it is fundamental that there be coordination of initiatives. That does not mean that all countries will carry out the same policies or have the same reactions. Actually, there are specific situations, peculiarities; the problems of advanced countries are not the same as those of developing countries, but there are common problems, for example the credit crunch, or for example the lack of liquidity, the problems of solvency.

Another important problem is a certain spillover of one economy's problems into other economy. In some cases, you have channels of contagion or spillover that are financial channels. For example, one country, an emerging country may have investments in an advanced country, sometimes involving even subprime assets, and other countries that do not have that kind of ramification. Brazil has no connection to subprime problems, but when there is a blockage of international liquidity, there is a shortage of resources, funding sources, then countries like Brazil can also be hit.

Another form of contagion or spillover is when there are problems in advanced countries. When there are investment funds that are running losses in the advanced countries, they withdraw the funds that they have invested in emerging countries. That is another problem that we have seen.

The exit of assets from stock markets in emerging countries and other forms of investments, financial investments, for example, in our countries raise new financial problems for emerging countries. So, there are many modalities of contagion which are leading us to require more coordination of policies.

So, it is important that the emerging countries work together, all of us, jointly with the advanced countries. The results today of this meeting at the IMF and of the G-20, the awareness building around the world crisis, that must be dealt with collectively, must be handled jointly by many countries. It seems to me that the crisis which raises all these problems has some advantage in reducing the personalism, individualism or nationalism, and bringing our countries closer together to solve problems.

The problems we have today in the world economy will have to be solve by many countries together. They will not be solved in a single-country or in a single continent. These are issues that must be solved together.

So, now I will stop talking and give you the floor. Please identify yourselves when you ask your questions.

Question - Mr. Minister, President Bush, we believe, had never come to the IMF, and much less to a meeting of the G-20. My question is, what is it that you are not getting from the G-7? What you are not getting out of the G-7, is it going to come out of the G-20; is a big solution going to come out of the G-20, the real solution?

Mr. Mantega - I think that the presence of President Bush at a meeting of the G-20, and for him coming to the IMF which hosted that meeting, first of all shows his interest in these institutions becoming more active to solve the crisis. He is giving support to institutions he thinks are important in the crisis. He also had a chance to refer and to speak with all the Ministers of Finance of the IMF, with the Council of Governors of the IMF, the 24 Ministers of Finance of the most important countries. So, he was really able to tune in to common efforts.

The U.S. government has a proposal of its own. They have got a rescue program, an aid program. But it has to be connected into the European programs as well, and by coming to the G-20 he is also saying that it is important to have a connection with emerging countries.

Question - I have two questions. First of all, what did President Bush say during the meeting? Did he make remarks or say specifically what can the emerging countries do to help solve this crisis, what concrete actions?

Mr. Mantega - President Bush, first of all, highlighted the seriousness of the economic crisis, the efforts that the U.S. is making to deal with the crisis. He recognized that the crisis epicenter is in advanced countries, mainly the U.S., but that he is doing all the efforts, and the U.S. government will carry out all possible efforts to solve the crisis, to overcome the crisis.

He also highlighted the importance of participation of other countries in the resolution of these problems. He also stayed for brief presentations made, one that I made where I spoke about the relationship between advanced countries compared to developing countries, what are the lines of connection between these two groups of countries, advanced and developing.

I said at first that the developing countries at the beginning did not suffer such great impacts, because the impacts to the crisis were mainly in the advanced economies; but even so, we had shortage of credit and higher costs for credit, and some capital fleeing from our stock markets and other investments and how then, with the intensification of the crisis, in a second stage we have even greater impacts for emerging countries, including a breakdown of international credit which is hurting international trade and also hurting the balance of payments in our countries.

There is the acceleration of flight of capital, and here I am not talking just about Brazil; I am talking about emerging countries in general. So, it does not fit Brazil in all cases, but in overall terms there are groups of countries, emerging countries that have even greater difficulties than Brazil. For example, in Eastern Europe they are having even more serious problems.

There are other countries that have problems with their balance of payments because of the flight of capital which had been put by investment funds. They are being repatriated, driving down the stock markets and making finance less available in these countries.

Speaking in general terms, in Brazil these issues have been minimized. We know that we have problems with access to loans for exports, but the government is developing new lines for that using part of our foreign reserves. The bureaucratic measures have already been implemented and this should become operational on Monday.

That flight of capital from the stock market which has devalued the stock and also reducing the capacity for funding, these are the main problems we have faced. President Bush, he listened to the presentations, understood, and seems to share the point of view that this crisis has to be dealt with jointly, because it also affects developing countries.

But one important thing that I did say is that, no doubt, this crisis will lead to lower growth rates in the countries, that this was well shown by economists this morning from the IMF. We expect almost a zero growth rate from the U.S. and the European Union for the second semester of 2008, and very small growth next year.

The emerging countries will grow faster, and I said that it will be up to the emerging countries to carry out countercyclical policies to maintain a certain level of world economic growth, to somehow neutralize the drop in economic growth in the advanced countries. So, the developing countries already have a certain level of growth and, with countercyclical policies, we can guarantee a certain level of world economic growth. First of all, we have to solve the credit crunch. We have an acute situation internationally; in the 2-3 weeks we have had an acute crisis, so the effort is to put out that fire, so all these instruments that have been proposed by advanced countries to try to get out of the acute stage; namely, in addition to injecting more liquidity into markets as has been done by central banks, the G-7 communiqué talks about capitalizing banks with the governments buying stock in banks. The U.K. has nationalized basically its major banks.

So, it is clear that there must be a greater offensive, a stronger offensive involving such measures to neutralize that process for us to get out of the credit crunch, which is the emergency, to get past that and get out of this corner that the world is in with the shortage of liquidity, and basically the problem of confidence, once we have re-established a minimum of confidence, we re-establish credit, some level of credit at a lower level than what we had before.

But the problem is the emerging countries not putting the brakes on their own economy. Some analysis had made that suggestion, which seems unfortunate to me, because that would just make the situation worse. The real problem we will have after solving the problem of credit in the financial institutions-and that will happen sooner or later-what will come afterwards would be a recession, lower growth rates. We have to fight that.

So, countries that do have their production capacities intact, that have domestic markets, it is important, because if we have a retraction of world trade, then we will be able to use our domestic markets more. China has a great tremendous domestic market, as do Russia, Brazil, and others, where we can expand domestic demand, and are doing that now. These countries then can rebalance themselves using their domestic markets.

So, these countries should not put their feet on the brake, nor should they step on the accelerator too much. We have to be prudent. We will have to live with less credit. We will have to live with higher interest rates, to begin with at least, until we can regularize the situation, because now the markets are irrational at this moment of acute crisis. We have a herd mentality and behavior, irrationality. Everybody mistrusts everyone. You start withdrawing investments indiscriminately, not knowing whether an institution is solid or not.

So, the advanced countries are facing that irrationality and we cannot allow that to be transmitted to the emerging countries that do not have the same problems that the advanced countries do. Brazil has solid financial institutions, and Brazil does not have a problem with subprime investments.

So, our countries have to continue making investments, maintaining high levels of investments and trying to maintain a certain level of growth. That is the responsibility of China, of India, Russia, Brazil, South Africa, it is up to Korea, the most dynamic emerging countries to sustain growth and neutralize the risks of international depression.

Question - From your point of view, this financial crisis, does that mark a fundamental change in the relationship between industrialized countries and emerging economies?

Mr. Mantega - I do not know whether there will be changes in relations between advanced countries and emerging countries. There will be a change in quality, no doubt, because we will need to regulate financial markets, reduce leveraging. In that sense, we will need to continue to have investments, but they have to be higher quality investments.

After the crisis, these emerging countries can even be benefited by the situation, because we provide more opportunities for yields to solid investments and offer better conditions for investments than in advanced countries. So, where relations will change, maybe if there is a joint action to fight the crisis we can develop new habits or perhaps even strengthen new institutions with greater cooperation among the countries at least during the crisis.

Question - Given what you have just discussed about the importance of coordination between the G-7 and G-20 countries, is it important that Treasury Secretary Paulson and Federal Reserve Chairman Bernanke come to Sao Paulo for next month's G-20 meeting?

Mr. Mantega - Yes, it will be very important for them to be in Sao Paulo because, by November, to a large extent, we will have to have overcome most of the acute problems in the crisis, but we will still have a number of problems still to solve. This is a not a short-term crisis.

The acute phase will not last long, I am sure, but after the acute phase we have the just condition where there will be many accommodations in the world economy. The world economy will have to go through major transformations coming out of this crisis, and those transformations will need to be coordinated by countries and guided by countries. The U.S. is one of the most important countries to help coordinate such changes.

For example, to restructure the international financial structure which needs to go through a major transformation, a new financial architecture internationally is needed with different rules, with more control, and less leveraging of countries. Some countries even already have these rules. Brazil has rules, for example, that are stronger for the oversight of financial institutions, and that means we have lower leveraging. We do not allow so much leveraging of our financial institutions and banks.

So, we need to build a new architecture and also face up to the problems of the crisis for some time to come. This crisis, even at a less acute phase, may last another six months or a year, but it will still take some time to be totally overcome. So, the governments in the countries and the economic teams will have to be at the head of these transformations.

Question - You mentioned the possibility that England and the U.S. could advance with their action plans involving banks affected by the crisis. Now, in terms of the interbank loans, this could affect emerging country banks. Is there a possibility that governments of emerging countries could also put public funds into buying stock in these institutions?

Mr. Mantega - I think interbank relations have already been compromised. There are restrictions between one bank and another. There is a need to re-establish those relations. I believe that for developing countries the situation is different. I think that the measures that have been adopted by the U.S. and by Great Britain are more extreme measures, because this is the epicenter of the crisis. So, the key problems are here and the behaviors that have to be changed are here.

The emerging countries do not need to take all the same decisions or initiatives. However, all central banks do have to provide liquidity for their own economies and restrictions on international liquidity, and some countries have some mistrust, some emerging countries, not Brazil, but I will not give names, but the governments have had to make major interventions. Russia, for example, put in $150 billion available for the financial markets.

So, I think that all central banks in countries are providing for more liquidity. Even in Brazil, the reserve requirements are being lowered. These are deposits that banks have to make in the central banks, they are being reduced. We put $30 billion of liquidity back into the market through lower reserve requirements.

All the banks are acting, the central banks are acting, but to deal with different problems. In England, for example, there is a problem of solvency of banks; the four biggest banks in Great Britain have problems. That is why Prime Minister Gordon Brown had to put in such a huge volume; I think it was a trillion.

Mr. Mantega - He had to put in a trillion dollars to solve the problems of these banks which are facing solvency problems. They were going broke. That is different from emerging countries where the banks are putting in money for liquidity problems. They are not going broke; there are not problems of solvency in Brazilian banks. We do not have bad assets, but the banks are loaning less money to other banks, and there are some withdrawals of foreign investments, repatriation of money to their countries, so we have some of those problems, and here finally.

Question - Between now and the next meeting in Sao Paulo, what will the G-20 Ministers be doing as their homework?

Mr. Mantega - Until the next meeting of the G-20, the Ministers of Finance, Presidents of central banks will be hour by hour monitoring all their markets. So, we have a lot of work to do between now and then. We will be working hard and at the same time our Deputies and our support teams will be developing proposals to make the G-20 into a more active institution that can act in the short term. Ideally, it should be something like a Situation Room. In a certain way, an acute crisis like this is kind of a war, a war against economies, and we need to create staff and a Situation Room and to provide ways of solving these problems. In Brazil, we meet several times a day. We are talking to each other all the time. We are in touch with the stock market, with the futures market, the financial institutions. When there are companies with problems, we look into them. We need to have a coordinating instrument. So, we would be working so that, by November, we could take a proposal to the G-20 of turning the G-20 into a more active institution that can meet more times a year, more than just once a year involving the Ministers, and have more rapid channels of communication.

Question - Mr. Minister, I have the impression that, in addition to the institutional process of creating the G-20, there is an emergency here. You said there needs to be a greater offensive to neutralize the crisis. Now, what is the concrete proposal out of the G-20, that the G-20 would propose to the G7 or what, to solve the problem?

The G-7 communiqué yesterday was criticized, because some said it was full of holes, somewhat vague. So, on Monday or Tuesday now in Brazil, when the markets reopen, it looks like there may be even greater drops in the markets. What can you do to prevent that?

Mr. Mantega - The G-20 is far behind the G-7. The G-7 meets all the time and has been turned into a management tool for crises. So, they meet every week. They have contact with each other much more frequently. The G-20 is behind them. The last time G-20 met involving Ministers and Presidents of central banks, Governors, was a year ago. So I was trying to organize a G-20 meeting and had been trying to for some time, and I saw how hard it was to find agendas for Treasury Ministers. So, we were only able to hold it here together with the IMF meetings.

So, the G-20 is running behind the G-7, and now the G-20 has to work faster. Today it became clearer that there is a global crisis affecting emerging and advanced countries, and emerging countries must have a greater presence in providing solutions, coordinating efforts and finding solutions to the crisis. So, we need to activate the G-20 quickly so that it can make up for the time that has been wasted.

Question - We have been talking about the reform of the IMF during the week. What kind of reform would you be expecting from the side of the International Monetary Fund in order to re-establish our stability?

Mr. Mantega - Well, the truth is that we should not talk about the reform of the Monetary Fund. We have already undertaken many reforms of the Monetary Fund in terms of the quota and the voting power, something that we have already achieved during the last meeting, the last Spring Meetings that is.

This IMF meeting was totally dedicated to the discussion of the crisis and finding solutions and alternatives for the U.S., and also in terms of the solutions presented by the G-7. We have not yet discussed deeply the changes within the Monetary Fund.

Question - You talked about flight of capital that was destabilizing some of the emerging markets, stock markets and other markets. Do you have any sense that any members of the G-20 would consider imposing capital controls or other ways in which they could stop as emergency measure money leaving their countries?

Mr. Mantega - Actually, we have observed the flight of capital from emerging countries for obvious motives, because when there is a shortage of capital in the advanced countries, when companies in advanced countries are running losses, they withdraw their investments in emerging countries.

We are not thinking about creating any kind of restriction, because I think it would not be productive at this time. It could even worsen the situation. I think that no solution moving into restricting the movement of capital, restricting international trade, which is another kind of reaction that might appear, none of that would be useful for overcoming the crisis.

We cannot repeat what happened in the 1930s and 1940s after the crisis of the 1929 when many countries shut down, became more protectionist, and restricted themselves more to domestic trade. When I say that we should take advantage of our domestic markets, that should not be done to the detriment of world trade. On the contrary. I think that global trade should continue to expand on a global scale, because it is good for all countries.

We do need to continue to overcome trade barriers that still do exist, particularly in some advanced countries, so that developing countries can increase their exports to those countries. So, I do not believe in that form of intervention, restricting the movement of capital or restricting foreign trade.

Question - Mr. Minister, the Lula government that you are part of has a social view that is very clear. Here at the IMF and the World Bank it has been said this week that this crisis, in addition to affecting and attacking markets, that it should not be allowed to affect the poor who are already needy coming out of the food crisis. How do you see that this crisis is affecting the poorest countries and the people who are hungry?

Mr. Mantega - Our concern is with the reduction of world economic activity which could result from this financial crisis. If there is a major reduction of international trade and of economic activity, then no doubt the emerging countries will be affected, particularly the commodity exporters. That is why we need to carry out countercyclical policies to sustain our economic activity.

Otherwise, if there is a reduction of growth rates in developing countries, we will have unemployment; we will have lower income for our population; we will have impacts on the social programs that are being carried out in so many countries. That is why Brazil is favorable to countercyclical policies. We do not intend to put our feet on the brakes of the economy.

We do, however, realize the need for adjustments in the economy, but those adjustments will not be to deactivate our economic growth. In Brazil, there will probably be some deceleration, as there will be in many countries of the world. The Chinese Minister spoke today saying he is working protecting a 9 percent growth rate next year. That is down from 12 percent this year. Minister Kudrin from Russia said he expects growth below 5 percent and now it is over 6 percent, so they are also assuming there will be lower growth rates.

In Brazil, although our economy is solid to deal with the crisis, we do need to presume that there will be lower growth rates. Because capital is getting more expensive, the financial costs, there will be some reduction in international demand for Brazil's exports. So, we are assuming some deceleration of Brazilian economic growth, but it will be a moderate deceleration.

The government has been working on that hypothesis for several months that, in 2009, our economy will grow less than in 2008 or 2007, but this is a moderate deceleration, just to readjust those components of the economy down to around 4, 4 1/2 percent. We would be satisfied with that new level, but that does not mean slowing the economy down or diving into a recession.

So, once we get past this initial trauma, the financial crisis, then working together developing and emerging countries can work on having policies to sustain higher growth, because you know that China exports a lot to Brazil and Brazil to China. India exports to Brazil, and back and forth. Brazil exports a lot to MERCOSUR, and back and forth. So, to maintain our emerging economies, to maintain their activities, will keep us from moving into economic slowdowns so we can help thereby maintain employment and income for our population, and avoid the deterioration of the living conditions for our people in Brazil and in many countries of the world.

Question - Mr. Mr. Minister, I have a question on the changes mentioned in the G-20. First of all, how did the members of the G-20 receive the proposal for changing the G-20-that was not mentioned in the communiqué-and to turn the G-20 into a more agile instrument, that that might include a change in the membership of the group. Is that the case?

Mr. Mantega - I think that the reaction was favorable. I felt no adverse reaction to that proposal. It was observed that, with its current makeup, the G-20 is not able to respond to crises like today's crisis. So, we could discuss whether the G-20 is the right institution to provide that response. That is what we will talk about. Maybe we will think about a different kind of institution other than the G-20. The G-20 could go on being a think tank, an institute for discussions, where you can sit back and think in the long term about deeper problems of the economy rather than emergencies.

Another issue that is being raised is why the G-20, why the big emerging countries are not members of the G-7. That problem is coming out now. Mr. Zoellick came out in favor of a broader G-7. Others also came up. So, I think that we need to rethink the G-7 as well. The G-7 is not enough, because it leaves out countries that today are as important economically as many countries in the G-7. So, it would be better that we be together sharing our decisions and actions.

Question - I wonder whether it would be possible to tell us about the discussion between you and the Chinese Minister today. Are you satisfied with the commitment made by China? Thank you.

Mr. Mantega - Actually, I did not have a discussion with the Chinese Minister today. In the proposals brought forward, the Chinese Minister had a position very close to the position that we brought forward. For instance, on the issue of the G-20, he has positively reinforced the G-20 and our mandate so that it then could have a stronger personality and the G-20 acting more presently in the current crisis. So, I felt that we came together in our positions in terms of the position of the emerging countries; also South Africa supported us and Russia also presented its support.

Another position that was supported and endorsed by many countries was with regard to the new liquidity lines, the International Monetary Fund's Rapid Access Credit Lines that we are also claiming for, where there was very strong support in this sense to have rapid approval of this line of credit. Therefore, emerging countries came together in this proposal.

Question - Minister, when facing this need of strengthening domestic consumer markets of countries that are important producers or have important markets such as Brazil, is there any kind of project of the Brazilian government in terms of how to strengthen the internal or the domestic consumer product? Is there any kind of new program in terms of the Brazilian government to increase the increase the middle class?

Mr. Mantega - The Chinese and Indian markets and the Brazilian markets are expanding almost simultaneously from the economic growth itself, the increase in employment, the increase in credit. With the support of programs, the population has improved its purchasing power. This is not only in Brazil, but also in China.

Therefore, there is better integration. For instance, there is a migration of contingencies from rural areas to urban centers. There is an increase in the income of the population once they transfer from rural areas. So, this certainly generates a consumer market in Brazil. We are witnessing an important social mobility with the growth of the so-called middle class.

This is a new phenomenon, the swelling of the middle class, certain segments of the population that have higher income and purchasing power that, therefore, are included in the consumer market, that are included in credit lines, that have better access to credit and to banks. Of course, this is a result of economic policies that are being implemented in Brazil.

However, our concern today in Brazil is not in terms of increasing the consumer market. It is to contain its growth. If I might remind you, the consumer market in Brazil was growing at the end of last year at a rate of 8.4 percent. This is the so-called domestic consumption ratio. It was 8.4 and now it has been reduced to 6.5 percent and we have stayed at that level. If you look at the monthly consumption research that will show what are the retail consumptions throughout Brazil, we had 14 percent growth from one year to the other.

Therefore, our problem in Brazil is not to give impetus to the consumer market. It is to allow it to grow at a slower pace, because it is already growing at a very strong pace. That is why we also have more favorable conditions, of course, in terms of facing a crisis such as this, because we already have a strong consumer market with an automatic impetus or driving force. So, it might maybe offset what is happening in the foreign markets with a more vigorous and robust domestic market.

Question - Minister, in the beginning of your interview you talked about deregulation. There was a deregulation of the financial market and this was an important factor to the crisis. I would like to hear from you your assessment in terms of the Brazilian market, because we have a more regulated market.

In the last three days, we have heard about Brazilian companies that have had important losses in terms of foreign exchange trades, banks that operate in Brazil. Do you believe that these operations through swaps and the losses are also due to a lack of regulation? Should someone oversee these contracts that are being swapped and how these companies have undertaken this risk?

The second part of my question is related to part of the companies that have contracted. Among them there is the presence of BNDS in the board. So, someone should be overseeing this. Is this something that did not go by, the management of the board of these companies?

Mr. Mantega - The Brazilian regulation system is more advanced than the American or European regulation systems. Therefore, the leverage levels of financial institutions in Brazil are lower. In Brazil, not only do you control the banking system itself and in a very tight way, we are subject to the Basel principles, and the rates are even lower than the Basel levels. The leverage levels in the Brazilian banks are around 14 percent when Basel indicates 8 percent. So, we are less leveraged.

The markets have multiple markets, the futures market is also regulated in Brazil. There is a mark to market in Brazil. Therefore, multi-market funds and banks are very well regulated. Of course, this will not avoid risks. There are certain entrepreneurs that take more risks and, of course, the government cannot oversee everything, especially when it is a company, a corporate risk.

In this case, you mentioned certain companies that were exposed to certain risks. Of course, we cannot control this, but we can control when a certain bank is exposed to greater risk. This would be detected by our mechanisms. These companies were within the (C-TIP?). Some of the companies that were operating in the derivatives market that were leveraged in dollars, that had dollar-denominated contracts, have suffered some losses that are well-known by the press.

But we cannot regulate the company or the corporate exposure. Of course, they can make their own decisions. They can leverage as they find more appropriate. But the banks that are working with these companies were not leveraged and these banks, yes, have oversight, government oversight, and the leverage level of banks is monitored and inspected in a very tight manner. Therefore, Brazil has a regulation and an oversight system that is very well-structured.

Of course, at given moments, there are some cracks, some breaches. For instance, we might have contracts of one company with another company. You might have so-called non-recorded, non- accounted contracts betting in future markets, and capitalist economies are economies that, of course, allow certain risks and exposure to risks. Of course, you cannot eliminate every risk, but there are more regulated systems and less regulated systems.

The Brazilian system is very regulated. Therefore, it could serve as an example for regulation in the European and American systems that do not have these so-called mark to market. If you do mark to market, you have to make everything transparent. You have to show all the accumulated issues. You have to have the mark to market. You have to have the real value of the assets that are included in those funds.

Even though you have a regulated system, of course, one company or another sometimes might take a greater risk and, therefore, pay the price for that. Of course, they pay the price, but it cannot break the system. You would never have in Brazil what happened, for instance, with the accumulation of toxic assets. There was a bubble of assets, of toxic assets that, once they were punctured, will create a systemic problem.

Question - Yesterday, Secretary Paulson said he agreed with the spirit and the letter of the statements of Mr. Zoellick when referring to the G-7 and this new increased forum that would also include emerging economies. Did President Bush refer to anything in that sense?

Mr. Mantega - Well, If I recall correctly, I do not remember him mentioning this, but the Chairman of the World Bank has a strong proximity to President Bush so maybe he was just giving his opinion.

I am afraid I cannot make any comments on this. I know that Italy, for instance, has favorably manifested itself in terms of increasing the G-7, and the Minister of Finance has said so. Also, France has some sympathy toward improving or increasing the G-7. It seems that a number of countries are seeing the need for increasing the G-7 and that the G-7 should also include, therefore, those that are responsible for the international economies.

I have been up since very early, so I will take only two more questions, please.

Question - Mr. Mantega, speaking about cooperation, how do you see the role of Russia in resolving the current financial crisis?

Mr. Mantega - I do not know exactly what is the situation in Russia. What I can say today is that Russia is one of the most important countries in the world, one of the most important economies in the world, a country that has almost 500 billion in reserves. It has oil; it has a very complex economy. Therefore, Russia has an important role to play in the world economy.

Therefore, I believe that Russia should be maintained within the group of international institutions that will make decisions, because we know that Russia has important weight in the economy, be it in the energy sector or even in the financial sector. Just look at the volume of resources that Russia is releasing. From what I know, $150 billion were already released by Russia, if I am not mistaken, to help solve the crisis.

Let me take the last question.

Question - Going back to the issue of practical proposals brought forward by the G-20, what would be a practical proposal since you have mentioned the proper regulation of the Brazilian market that could be a model to Europe and to the U.S., maybe creating a model for these countries that are part of the G-20 group based on the Brazilian regulation model, and another proposal could be maybe a more frequent meeting of this group.

Mr. Mantega - Let us start with the last part of your question. Certainly, we have to meet more frequently and this is a basic proposal. We have to have in the G-20 at least four meetings a year, the number of meetings that we have in MERCOSUR. There is a group of Ministers of Foreign Relations and Economy Finance Ministers that meet four times a year to solve the issue, so the G-20 should have at least the same setting, the same framework.

The regulation model used in Brazil is not something very creative. We did not invent it. It is just a rational, logical model and that is to limit leveraging. This is something natural in markets. If you take the Basel principles, for instance, previously the banking system was deregulated and there was a crisis that resulted from that. It was an 1989 crisis. This is where Basel was implemented. We established stronger regulation in the banking systems around the world.

The problem that we witnessed in developed countries was that there was a regulation that was open, that was rendered more flexible. For instance, investment banks such as Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns, they had or followed a regulation that was eliminated.

In 2004, for instance, the governments just suppressed; the EC suppressed the regulation and they, therefore, could leverage as they wished. So, they no longer had regulated leveraging and they could leverage 35 or 40 times more than what they had in the past, and that is one of the roots of the problem we have today. Here in the U.S., there was greater regulation that was actually suppressed.

On the other hand, there was also the arrival of new financial tools that were less known and less active than in the past. For instance, hedge funds are something new. Previously, they did not have a very strong participation in capital markets and, with time, they gained greater economic weight and people just forget to regulate these instruments, these facilities.

There were some facilities that had regulation and were then deregulated. Other instruments were new and they were let loose, so to speak. In the case of Brazil, hedge funds in Brazil are multi-market funds that are already regulated.

Therefore, there is not any great novelty in terms of regulation. This is something a bit obvious. It is more an issue of decision, the political decision to regulate or not capital markets. I believe that here in the U.S. there was a very strong influence of the financial system of Wall Street in general to allow a deregulated market, to allow part of the financial system to be deregulated so that they could maybe propose more businesses and leverage their capital, and this is what happened. In Brazil, we did not do so.

Thank you very much for your attention. I wish you very good work ahead of you. We know that you have to go back to your newsrooms now.



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