Transcript of an IMF Briefing on Latin America

September 23, 2002

Monday, September 23, 2002
Washington, D.C.

HORST KÖHLER, Managing Director
ANNE KRUEGER, First Deputy Managing Director
ANOOP SINGH, Director, Western Hemisphere Department
THOMAS C. DAWSON, Director, External Relations Department

MR. KÖHLER: Good morning. I would like to begin with a few words on our current thinking on Latin America, the status of our dialogue on Argentina, and Brazil's new economic program which we hope will facilitate a smooth political transition and a return to higher growth.

This has been a difficult year for many countries in Latin America. Growth is weak, on average, but with performance varying from country to country depending on individual circumstances. The region has faced external shocks, notably the rise in global risk aversion and borrowing costs, and the electoral cycle in many countries and underlying vulnerabilities have magnified the impact on economic activity and investor uncertainty.

The WEO that you will receive tomorrow will show slowing growth across the continent, with sharp contractions in Argentina, Uruguay, and Venezuela. Direct contagion from the Argentina crisis has been relatively limited, and experienced most in neighboring Uruguay and Paraguay, although there have been clear indirect effects as investors have focused attention on underlying vulnerabilities.

The position of some countries remains relatively strong, with growth clearly positive this year in Chile and Mexico, illustrating that sound policy management is the best protection against cyclical downturns as well as contagion.

At this stage, we expect a return to growth in 2003 for all countries, although this will depend upon maintaining the domestic consensus for economic reforms on the one hand and on a steadily improving external environment on the other.

Now some remarks about Argentina. The situation in Argentina remains very serious, and it is a country of great concern for us. Argentina's recession is by far its deepest in the post-war period. While there are some recent encouraging signs in the great stability of economic and financial variables, the unemployment and social situation remains difficult, and a firm foundation for recovery has still to develop. This environment and this situation is for the IMF clearly an incentive, an urgent understanding that we need to find a way to help Argentina.

The main issues on the agenda are as follows:

First, establishing a monetary anchor. This requires dealing with the uncertainties for deposit leakages.

Second, we need to complete the fiscal framework by ratifying the bilateral agreements of the provinces and beginning their full implementation, and the President has told me last week in a telephone conversation that he expects now Buenos Aires to produce good news.

Finalizing a clear strategy for bank restructuring. Here there have been numerous missions in Buenos Aires and talks here in Washington. There is progress, but still there needs to be a finalization of these talks. And maintaining also coherence in economic policies is important by avoiding policy reversals that prolong a climate of investor uncertainty.

My concern is that ongoing debate in Congress about back and forth, of course, doesn't give investors assurance there is now a clear-cut direction.

We are working intensively with the authorities in Argentina to resolve these and other issues, and we are making progress in regard to that. Our joint efforts remain guided by the clear objective of putting in place an economic program that would maintain macroeconomic stability during the political transition and pave the way for broader structural reform and growth resume in 2003. And our approach insofar remains the same we had from the beginning of our talks with President Duhalde, the short-term, relatively short-term agreement for stabilization and then with the new government a more medium-term approach also to take a broader concept for structural reforms.

We are hopeful that all concerned parties in Argentina will come together so that this objective can be quickly and finally achieved. We are hopeful—and I would also like to use this meeting with you as a kind of appeal to the parties in Argentina to pull together at least to this minimum degree of consensus for getting a [inaudible] to the situation in Argentina and from this basis to improve the situation.

As I mentioned before, I had a very constructive conversation with President Duhalde last week on the phone, and I not least also asked him how he sees the situation in Congress, and, of course, we rely very much on him to organize some common understanding in Congress about what is needed now in Argentina to improve the situation.

For our part, we are ready to cooperate in any way that will help. Minister Lavagna will come soon to Washington, and I am really looking forward to have a meeting with him.

A few remarks on Brazil. Here, the situation has been complicated by investors' desire for clear indications of economic policy continuity by the successor government. Brazil's new economic program seeks to provide such reassurance, and investor confidence clearly improved after the main presidential candidates indicated their support for the core elements of the program. At the same time, macroeconomic policies remain strong, underpinned by inflation-targeting framework, the floating exchange rate regime, and a strong medium-term setting for fiscal policy aimed at maintaining debt sustainability. And, Mr. Sotero, at my first meeting with you, during that telephone interview, we talked about Brazil, and you asked me: do you really know the situation, do you know the country? And I learned after this that indeed Brazil has a strong financial banking sector, which is one of the fundamentals—and you made me aware about that.

At the same time, macroeconomic policies remain strong. With this fiscal and economic framework we feel there is a good process.

Sustained implementation of these policies will assure that Brazil's situation is sound going forward and will establish the framework for growth to strengthen.

Financial markets will probably remain volatile—that is a matter of reality—until the uncertainties around the political transition are resolved, and we should not be overly surprised by this. But we expect to see a quick return to more normal conditions in the market once the transition is complete.

In this context, I want to be very clear—and I have said it from the outset of the new turbulences around Brazil—that the Fund is prepared to cooperate fully with whatever government the people of Brazil choose to represent them. We are not having in mind to support one specific candidate, and we also do think it is only natural that any President-elect will have his own views of what is right for the country. And we will take this discussion up as soon as this is decided by the electorate in Brazil.

So that is the introduction. Sorry that it may have been too long but I tought it made sense to present it to you. Thank you.

QUESTION: My question is about the political consensus that everybody is worried about. Argentina has a government that is in transition. There is an upcoming election where we have three candidates. And then, well, we have Congress and we have a court, and the court is not ruling always in the sense that the IMF or even the government would like. So in this frame, how can you define consensus? What will be the indications that you will say now there is a consensus, this prior action has been accomplished?

MR. KÖHLER: Well, I think the matter of consensus is a question for the Argentines, for their system. I feel this is maybe the most difficult problem, that, say, there are too many Argentine institutions, groups, families, who are pulling in different directions. That is what I see still as the main problem. And if this is not really improving, I would think that they are missing the point and that they are not acting in the interest of the people. Because it is really time—after these months and months of disaster, social dislocation, hardships—that at least up to the election the political infighting should be limited.

And I do think that President Duhalde, having declared that he is a transitional President, should have the authority, and the fighting parties should give him this authority in this transition time, to speak up as the authority of Argentina and to work with us.

We need to have a minimum degree of judgment that whatever we agree with President Duhalde and his government will be implemented or will work. We do not want to interfere in this process. We do not want to say this President is good, this President is bad. We do not want to say that the judicial system is—I do not know what. That is an Argentine issue. But the Argentines, and all these parties and institutions I have mentioed, should understand that we cannot present to our Board an agreement where we have no indication or at least a judgment about the probabilities that what we have agreed with this President or this government will be implemented. That is the core problem, and I hope indeed that we make progress, and I have some optimism now. But I need to be realistic also to tell you the following: we have discussed last week for the first time a report of the Independent Evaluation Office where they told us, the independent evaluators, that we need to have a judgment about, if it is decreed, if it is really going to be implemented. If we have the judgment that is not reasonable this IEO report recommends us not to agree on programs. So that is the situation.

MS. KRUEGER: In many countries when there have been difficulties, economic difficulties of the general kind that Argentina has, there comes a point when most people in society—never everybody, but most people in society— recognize that they have a common interest in getting out of the mess that leads to what the political scientists often call "suspension of politics as usual", meaning that there is some recognition that there is a common good and that for at least a period of time until these things get sorted out, this common interest should override some of the particular interests that are the normal, everyday business of politics. And we have seen that in some countries. We have seen it in Turkey. We saw it in Korea. We have seen it in some others. We are, as far as we can tell, not seeing it to anything like the same degree in Argentina. There still seems to be, if you like, this reluctance to say: okay, we are in this boat together, we have all got an interest in seeing it move more smoothly. And, therefore, it is in everybody's interest to get together on these fundamentals to avoid some continuing low level of output, to restore economic growth and all the rest of it. So that, I would have thought, was in almost every Argentine's interest, and this is what is to me so puzzling, that we do not see any of this political consensus which would support a program regardless of what the political eventualities were.

QUESTION: Mr. Singh, you have been to Argentina. My question is whether you agree with what has been said and if you could substantiate it with your experience.

MR. KÖHLER: Well, I think Mr. Singh should not agree what management just said.


MR. KÖHLER: That doesn't mean that I give him a kind of direction what he has to say, but we should here be very open. Anoop, please?

MR. SINGH: Let me just say that in the two visits I have had to Argentina, what we try to do very much as a team is to meet a lot of people from all over the place. We tried to meet people, of course, from the government. We met many Governors. We met trade unions. We met bankers. We met academics. And I was asked very often why are we spending so much time meeting these people. So I explained that we are working on a program, working on economic policies, but in a crisis that is as deep as Argentina's, it is very important to understand how is the crisis perceived by the Argentines themselves. It is they who are experiencing the crisis. Only then can we understand what lies behind the crisis in the view of the Argentines; and, number two, what is their solution for the crisis.

And here I can tell you that we got a very good response. People responded to us in a professional and friendly way. There was none of this political nonsense we sometimes see around us. They told us their individual views. We got letters. And the common theme of those discussions was the need to come together. And I have a letter written by school children in a school in Salta that actually uses these words: we want to come together, and the words were, "as a family so that we can be happy in Argentina."

And so I really think that the people want to come together in a consensus, and what we are working on is just one dimension of it, the economics of it. But I do think the economic side is fundamental for stability overall. And I think our call for consensus is nothing more than what has been experienced today by Argentines, whether they are in school or whether they are working. This is my view.

QUESTION: I have never been able to really get a full answer to this question I will put forward, so here in this more intimate setting, let us see if I can. The way I see things is that this is a vicious cycle, what is going on with Argentina. Argentina is in a bad situation, the IMF doesn't help, the international community doesn't help, the investors take the money out, then Argentina gets worse, and then it keeps going.

In a very simplistic way, it is like a family in conflict needing intervention. But the people who are intervening are not really helping.

So a the situation which is bad becomes worse. And the IMF will help only if Argentina does something, and if Argentina does not do it—it is just a vicious cycle that I would like to understand better the IMF position in a more, you know, elaborate kind of way, if possible.

MR. KÖHLER: I think it is not as complicated as you told us just now. Why? First, the IMF never asks for the impossible. When we are saying—and that is our philosophy—we need to have a comprehensive, sustainable program, this is quite often a lot. But in the case of Argentina we are not asking for everything needed. What we ask for are a few things. Take, for instance, this monetary anchor. Argentines have a history of decades of crises and, in particular, inflation, hyperinflation. The hyperinflation of the 1980's led to President Menem's policy and the currency board.

I think that whatever we do, we should not end up again in hyperinflation, and, therefore, we are saying we need to have some kind of monetary anchor because if you cannot anchor money supply, how can you protect against inflation? This basic idea is deeply rooted in the people's mind. They were angry about the situation and moved to the dollar when they thought that their own currency was not good.

So I want to say this anchor is not just a theoretical concept of this institution. It is even more, I think, rooted in the society in Argentina. Therefore, we put such an importance on it.

Secondly, the fiscal. I mean, Argentina wants to be open to the international community. Despite all of the peculiarities of their history and its ups and downs, what is right is that Argentines are open and do not want to be cut off from the international community. The international community—and that includes, in particular, investors—need to have a minimum understanding about order in the country. And this means also fiscal order. And here the provinces play a crucial role because it is a matter of fact that the fiscal disorder was not least, possibly even mainly, located in the provinces. And this has the effect that even today the statistics between provinces are not yet clearly comparable in all details.

I think historically it comes from the fact that Argentina was built up as a nation from the provinces, not from the center. But, this proud, powerful nation, cannot get its potential together if every province has its own understanding about what is right, what is wrong and its own understanding about the common good for Argentina.

Therefore, again, we are not asking for the impossible. We are not asking for too many things. We are only asking for just a few things.

And this other point that we have asked for some minimum consensus in the society, also including institutions like a judicial system, Congress, and so on, I mean, I think this is not impossible, and you cannot put it in a vicious cycle as a judgment. Nothing will get better if in the society, there is not a minimum, say, desire to hope. Without having rules for the game, how can a society work together?

So, therefore, what we are saying as a kind of appeal is: please, we want to come to an agreement with President Duhalde, please, society, let's give him this authority, the competence, so that he can agree on something with us so that we on our side have at least a judgment and are able to present it to our Board as something that it is going to be implemented. There is a famous German writer who had a lot of stories about a young boy who was a very intelligent boy but behaved absolutely not as his parents wanted him to. When he had to promise something, he said, "Yes, I'll do it", but behind his back he crossed fingers, and by crossing fingers behind the back he meant he didn't need to do it. Sometimes I have the feeling that this is what happened to us with Argentina. We make agreements, but they are not implemented. Of course, I am not going to blame Argentina alone. Maybe we had asked also things they could not implement. That is a fair question. We are in the process of reviewing them. Certainly we have also our share in some developments. But this cannot deviate from the core problem, and this is that the key for this situation to be solved, or to be improved, lives in Argentina itself.

MS. KRUEGER: If I could just add something there. Another way of saying it is that we can't help unless Argentina will do at least a minimum to help itself.

QUESTION: But the point that I would like to understand is that Argentina will not be able to do it unless you help, so that—

MS. KRUEGER: That is where I would disagree with you. We can help and we can make the adjustment easier. There is no doubt. And we want to do that. But unless Argentine authorities do their minimum, whatever we do is not going to make any difference six months later.

MR. DAWSON: And it is in their interest to do so.

MS. KRUEGER: And it is in their interest to do so, but it is the kind of thing where, yes, if you will do your part, then we can help—"you" being Argentina—but for us on our own, to lend where the fiscal situation is what it was, when there was no monetary anchor, when all these things are going on, like the "corralito", et cetera, I guarantee you that three months later things would have been right back to where they were.

MR. KÖHLER: You will recall—I was so happy, we all have been so happy—when President Duhalde with the governors published on April 24, the 15 points.

That was a good outline for an approach, and I thought that was really something we could build on—I mean, we are now months later, and the provinces themselves back and forth. But if a leader should be elected—and I am sure it will happen—I mean, he or she should know, everybody should know, whoever is elected, he has to have a sense of responsibility for the nation as a whole. And, therefore, all potential leaders now should speak up and say let us forget specifics of campaign, but now let us prepare the ground for an agreement with the Fund. And we are the first to honor that.

QUESTION: It strikes one then that you complain about the situation in the country where it is evident what the country needs, people in the country want to do it, but inevitably the political leader of the country is not contributing. The question is, why doesn't the IMF just say no?

MR. KÖHLER: Because we still hope that we can come to an agreement and there is progress. The fiscal framework seems to be possible to agree.

There is stabilization in terms of inflation and even business activity. People try to help themselves,so there is some improvement. We should not give up. We are patient, but we have also to have our minimum kind of firmness not to demonstrate whatever happens, the Fund will justify everything. So we stick to our few criteria, and I hope—and I want to be hopeful that we come to an agreement.

QUESTION: I wonder about when you, the IMF, saw it coming. Did it see it coming? Because it did not happen overnight in Argentina. I mean, every three months you sent people there, they came back with a review, and you would lend some more money. And all of a sudden, it seems the mess came up.

MS. KRUEGER: Everybody saw things getting worse in Argentina before the program at the end of 2000. Then there was hope that there would be some correction of the fiscal situation, and, of course, that did not happen, which is what led to the departure of the then-Economy Minister and so on. Then came in the new Economy Minister, and he said, okay, we are going to go to zero fiscal deficit, and the zero deficit law was passed.

Now, you are asking why did we keep on working with the Argentines. One reason is simply that Argentina is a member country, and we want to help if we can. As long as there is any hope, we will do so.

Now, in that case, the zero deficit law was in place. It was passed in, I think, July. The last Argentine loan was in August. Then come the first review, it was very clear that the zero deficit law, despite its existence, could not be implemented, at which point it was reasonably clear that something had to be done to bring the situation back to something that would offer a sustainable basis. So as long as there was hope that Argentina would address its issues its way—you could think of other approaches, but that is the one that Argentines said they preferred, and if they had implemented that, I believe there was a significant chance that it would have worked. And we want members to choose their own ways to do it, and that was one way if they could then have done it. But when those numbers came in at the end of September, October, November ... No more.

MR. KÖHLER: What I have an interest again and again to say is that zero deficit law was an idea of the government at that time, and it was passed by Congress. It was not the idea of the Fund. We accepted it because we heard it from the press and then thought, okay, if they have the strength to turn it around, then it may work. That was the situation. Congress passed this law, but as it turns out then, it seems that not too many in Congress believed they are in charge of implementing this law. And this is still the situation.

QUESTION: Since the IMF has been studying the introduction of a sovereign debt restructuring mechanism or SDRM,or the adoption of a collective action clause in the contracts, I would like to know if this was in some point discussed with Brazil, the Brazilian administration, and how to assess the need for Brazil to do that in the future.

MR. KÖHLER: Well, here is our expert, Anne Krueger. But let me, as a kind of introduction, say the following: Brazil is, of course, a member, and they have a very good team. They have a very good Executive Director. He makes all the points. He is involved in this discussion. So they are part of this discussion. But, of course, the more political question is: what does it mean for Brazil in this situation?

I want to tell you it has no meaning because we feel that the right policy—they do not need to restructure, the Brazilians. They do not need it. And this is why we said we would like, we would appreciate if all major candidates would endorse at least the core elements of the program because we feel that, with the potential of Brazil, which is a huge potential, and these core elements of the program, they will grow, literally, out of the problem. And I will not give up that this is a preferred option. With everybody who talks in election campaigns and all these many advisors in the world and intellectuals who know everything, there are always, possibly, different options. But I strongly do think Brazil has the potential to take the option, get out of this difficulty through growth, a credible policy. They do not need to work on the basis of restructuring. It's not unavoidable. That is our advice.


MS. KRUEGER: There is nothing—and there was no discussion of restructuring. There is no reason to restructure. If you look at the real interest rate in Brazil over the past, say, ten years, if you look at the average rate of growth, figure that debt to GDP will be about 60 percent at the end of this year, more or less, figure that the real exchange rate has depreciated, it won't depreciate more. If it appreciated, debt to GDP would go down. As you know, debt to GDP goes down about a half a percentage point for every percentage point of real appreciation. So figure it won't depreciate any more. Then figure on growth at an average of, let us say, 3.5 percent, which is not ambitious relative to the past, 3.5 percent plus 3-3/4 percent primary surplus before this year means that the debt to GDP would go down on that basis and that debt is sustainable.

Now, if growth is higher, debt is even more sustainable. If the real interest rate is lower, better yet. So, I mean, I think that that is a reasonably conservative estimate based on not the crisis numbers right now, but the numbers in the past. So there was no discussion in the program. The Brazilian authorities quite clearly are determined that they will maintain their standing in the international community, got no interest in the discussion. Nobody raised the issue on either side. It was just not thought about because there was no reason to, given that debt seemed sustainable and they interpreted it. And I believe that for the most part markets are reacting to political uncertainty, and if the new President when he is elected comes in and gives the markets reassurance, I think that things will revert to more normal values very quickly, and that that will in itself be sufficient.

In the program it does say that should there need to be an increase in the primary surplus because we have misestimated that, that would be happening. So we could re-evaluate that, but I think we have got some cushion in those numbers.

The second part of the answer is—I happened to be at the World Bank in the 1980s when there was the first so-called debt crisis, and since then most people in the international community have recognized that there needs to be some kind of a mechanism that makes the debt restructuring, when it has to happen, less messy. But they have also recognized that it is costly. People are not going to do it just because they say the mechanism is there. And, in any event, anything that happens—happens or happened last year, this year, next year—is irrelevant for that because we could not possibly get things done in time to make a difference.

QUESTION: Last week, Ms. Krueger said that there is a kind of a deadline for Argentina in terms of payments to their multilaterals, and there is some discussion among politicians and among professional economists about if Argentina should pay them up.

In dealing with Argentina, when you are negotiating this kind of minimum framework, you are part of the discussion, and you are part of the process generating enough consensus. Don't you feel that given the impression that you are somehow going away from the possibility of an agreement, you eventually are encouraging the most irrational leaders inside, in the political spectrum, that actually do not want an agreement, but in looking for a consensus, perhaps you are—if you push too much, you actually generate the opposite?

QUESTION: I have a little follow-up. In fact, it is true that the majority of the government and the majority of the people now, according to the polls, say that we should not pay anymore if there is no agreement. And that is serious because—

MR. KÖHLER: That is certainly a serious question, and the difficulty is that there is—there are not too many people, at least official people and people with authority in Argentina, who talk to their people in honesty and transparency. Not too many. Everybody has a specific interest position and fights for it. But if you talk to the people and tell them that we are in a difficult situation, that we may not come out of it without pain, like I said months ago, then you are depicted, as they depicted me, as a kind of stupid guy who wants to impose pain on the Argentines.

So I am always surprised at how able the media are to concentrate on comments from outside. They comment on everything here, but they do not comment or discuss what has to happen inside in Argentina. Let this stupid Mr. Köhler talk what he wants, but we are aware we need to do something so that the situation improves.

This is, again, this situation in which there is a lack of—how should I say it?—responsibility. Looking at the interest of Argentina on the whole, there is not a public debate about what do we have to do in Argentina, and then let us discuss that. We can also discuss what the IMF should do or not do and all these others, but, please, also don't forget what is our own job. That's part of the problem.

I am aware that, of course, people could say I am fed up. That could be said by people who just maybe are less informed about the context and how should—why should an ordinary Argentine know all the specifics about the international financial institutions, the IFIs, the IMF, and monetary policy and so on. He just wants to have a decent job, security, and a family he can care for. That is what he wants. So I should not expect from him to understand but I should expect from some leaders that they try to explain to the people their situation, and that is not a guarantee that the people then will accept that they need to have a kind of working relationship with us or the international community.

I am not sure that they accept because they care for the most immediate thing, but there is a chance because the Argentine people are, in my view, not less intelligent than others.

As for our contribution, and it can only be a contribution, although I know it helps Argentina, I do not want to see our contribution mainly as something that helps to preserve an international system of IFI financing. At the end, it is important that it helps Argentina and not that we are repaid, the World Bank is repaid, or so.

I hope that Argentina will not fall in arrears. We are working at least to try to do our job that this is not happening. But this falling in arrears is for me not the most decisive point for what has to happen. More important is that whatever we do, it be a contribution for an improvement to bring back sustainable development so that Argentina can get out of the mess.

MS. KRUEGER: I share that view, but I would also add just one more thing which goes along the same line. We face this dilemma in a number of countries, not just Argentina. Argentina is perhaps the most visible right now. But there are a number of countries where, for whatever reason, the politicians want to go and do things that are going to have longer-term or medium-term or even short-term consequences that are truthfully not sustainable and not acceptable and it is not a basis on which we can lend.

Now, when you hit this gulf, if you like, between what the politicians are willing to do and what is in some sense economically defensible, then the Fund is really caught, because, on the one hand, it may be interpreted that we are not contributing to whatever; it may be thought that, on the other hand, we cannot back down on what I will call the minimum bare essentials of something that offers hope for, in this case, Argentina in the longer term. And we are caught that way in a number of countries where the economic policies that are being put forward are things that simply you just can see are something coming on up ahead.

The second part of the argument, I think, is that I do believe that one of these days, I hope soon, the Argentine body politic, including the politicians and the people, are going to recognize that they have got to somehow get together and get their act together on a program that will permit them to resume economic growth. And when that happens, I think things will sort out in terms of IFI financing and everything else. And like the Managing Director—until that happens, if that is the cost to us that we don't get paid that is very unfortunate for Argentina and—but I do not believe it will be a long-term situation for either of us.

MR. KÖHLER: I should also add to this, I was very eager that we have in place something for social alleviation from the beginning. And I discussed it a lot with Enrique Iglesias and Jim Wolfensohn, and as you may know, the World Bank offers this, I think it is called head of household program. Can you imagine that even now, months after this was produced, they have not yet agreed the rules for this program, the governance rules for this program?

I do not know why. I mean, I am so puzzled, really.

QUESTION: At the end there will be an agreement [inaudible]. At the end of the discussion either with this government or the next government. Could you possibly estimate when? A lot of people think in Argentina that this will never happen.

MS. KRUEGER: How many missions have we sent to Argentina this year?

MR. SINGH: We made a count. This year alone there have been a total of 21 visits.

MS. KRUEGER: Did we do that without intention to agree on a program?

QUESTION: Mr. Köhler, last week at the Council of Americas, you mentioned that the IMF has learned to be more humble and that the Fund has to accept risk. You made a reference to overshooting, and my question is regarding Latin America and Brazil in relation to inflation. My question is: Is the Fund ready to accept higher rates of inflation, or do you think Latin America still cannot have higher rates of inflation without reaching hyperinflation?

MR. KÖHLER: Well, I mean, the inflation rate, it is not carved in stone that only 0 percent is the right approach or only this works. It is always part of a dynamic economy. But we have accumulated enough experience to be able to say that high inflation is not good for the poor because it diminishes the value of their money. It is not good at the end for investors because it makes it difficult or them, high inflation, to calculate. And we have experience enough that low inflation is good for sustained growth.

But I would guess that every country has its own set of objectives and what is the outcome of a policy approach. I can give an example of a discussion about a bit more inflation. There was a famous German Chancellor, Helmut Schmidt, whom I admire very much, and I worked with him, and we are still in contact. He produced this formula end of the '70s, a bit more inflation is better than a bit more unemployment.

The outcome of this was that they had more inflation and more unemployment in Germany, and it did not work.

So, I mean, that does not mean that there is any precooked set of data which means that this is right, this is wrong. You need always to put it in the context of a special country, the environment, the particular constraints, and all of this. And at the end it is a mix. But the direction of low inflation, stability, I think serves well particularly Brazil, which has such a high potential and which heavily, I think, took advantage of foreign direct investment. They should not put in danger this prospect of further foreign direct investment through being [inaudible]. Now, loosen a bit monetary policy, then we have more growth and all of this. It's dangerous.

QUESTION: You mentioned about leaders telling the truth to their people, speaking the truth to their people. The leading presidential candidate in Brazil, that may very well win the election on October 6th, said yesterday in a speech that the first year of his government will be a very difficult one. It leads to a two-fold question I have.

In addition to the reassurances you received from Mr. Malan, Mr. Arminio Fraga, in terms of what the candidates were saying about the agreement with the Fund, has the Fund sought or was any candidate or representative of—has there been a dialogue between the Fund and representatives of the candidates, or have all the assurances been given through Mr. Malan and Mr. Arminio Fraga?

The other thing is: How does a positive or a negative outcome in Brazil influence your efforts here to reform the whole crisis prevention that you and Ms. Krueger are so much directly involved with? How does a positive or a negative outcome play?

MR. KÖHLER: In relation to the first question, I talked to President Cardoso, I talked to Minister Malan and Mr. Fraga, and we relied on their judgment about what was appropriate for a direct dialogue with the candidates. I can tell you that I am prepared to meet with any candidate or President-elect as soon as possible if he wants to meet with me. So I am prepared to have a direct dialogue with any candidate, or President-elect, whenever they want to take up this dialogue.

Second, negative outcome, I do not know what is a negative outcome, I mean, from the election because I—

QUESTION: No, no, I am sorry. I am referring to the fact there is a hope that the support of the Fund will make it possible for us, when we elect a President, that the situation will not destabilize, that we will make—we will go through—we will not renegotiate debt. But there is also concern that it may not happen that way and that indeed the situation could deteriorate if the new President gives wrong signals, et cetera, et cetera, because we know that the margin of error for us is not zero. It's negative. So it is in that context. It is not the negative outcome or positive outcome in Brazilian elections. You made a calculated risk, a reasonable risk, as you called in your speech the other day, that Brazil will make it. My question is—obviously for us, we know how much we are going to pay if we don't make it. We have families there.

Now, for this exercise that you are making here to reform the Fund, to do crisis prevention, et cetera, how important is—or what happens if we make it, what happens if we don't make it to your—what happens if we screw up?

MS. KRUEGER: Well, first off, the program is back loaded. Most of the disbursements come after there is a new President-elect if not a new President. But in that sense, most of the support comes, and if so—we tried to do the best we could to move the odds in favor of a good outcome. In terms of what that does to the international financial architecture, first valid impact, I cannot think of how it affects it. I mean, I think the international community is set on trying to improve crisis prevention and crisis resolution. We are going to continue on that. I think the various parts we have talked about before are still there.

Obviously we will go back and say what lessons could we have learned, but if I could tell you what they will have been, if that were to happen, if I could use that many if's, obviously if I knew the lessons now, if there are any, we would have incorporated them. So that is a very hard one. But I think in terms of where we are going, we think the Brazilian macroeconomic stance is broadly conducive to sustainability.

By the way, I would not be surprised if the new President chooses to follow policies and if the markets are reassured, if Brazil's economic upturn did not happen much more rapidly than people think.

MR. KÖHLER: We will not turn our back. We will not turn our back to Brazil whatever happens. But we feel it was right to be proactive, also to be, if you want so, generous because there is the potential and the alternative is dire. But whatever happens, we will not turn our back to Brazil. But we should discuss any different situation when the situation is there.

MR. SINGH: Let me just make one comment on that. We are all in the press and other ways focusing on what happens if there is a negative outcome. I think you should also consider and publicize the huge payoffs for Brazil and the Brazilian people if there is a positive outcome. And that cannot be measured in numbers, but if you consider the impact on people, individuals and families, of growth going back to 3 and 4 percent, you are talking of a huge event for the country that is among the largest in the world.

QUESTION Well, you said that Brazil should stabilize, and that after the elections, the political uncertainties are over. So my question is, real quickly, what do you think the exchange rate will stabilize at?


MS. KRUEGER: As I said, I think it is really safe to assume that there would be no more real depreciation.

MR. KÖHLER: Let me make a final comment on Latin America, and, again, going back to Mr. Sotero, I indeed learned a lot in these two and a half years I am now here. But I am basically optimistic. There is now a risk of backlash from everywhere, difficult situation in Argentina, anti-globalization discussion, clearly this greater world economy, though I had liked to be in a different situation. But, people, we should not confuse ourselves. At the end it is the potential, it is the will, it is the policy which will stay the course. And I have no doubt that there can be and will be a bright future in Latin America. We will try to do our job in this context. Anoop Singh, Anne Krueger, we all are now concentrating on Latin America, systematically discussing what kind of lessons learned should we draw from our experience, and on this basis how can we improve. I am basically not pessimist.

MR. DAWSON: Thank you very much.

[Whereupon, the press briefing was concluded.]


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