Brazil is about to receive another IMF bailout, funded chiefly by American taxpayers.  While the main beneficiaries will be a few private banks whose loans are at risk, there is practically no public debate about the deal.

This is the second Brazilian bailout in only four years.  In the summer of 1998, the IMF put together a $41.5-billion rescue package to help Brazil avert a financial crisis.  On September 29 of that year, the Financial Times warned that “Washington [is] on red alert over Brazil . . . damage to Latin America’s largest economy would bring crisis right to U.S. front door.”  Earlier in 1998, according to the Federal Reserve, U.S. bank exposure to Brazil had exceeded $27 billion; by contrast, these same banks only had a $6.8-billion exposure in Russia.  “If Brazil goes,” debt strategists at Merrill Lynch warned, “there will be no way of shielding the U.S. economy” from the crisis.  In the end, Brazil did not “go,” because public money was used to rescue private investors who had placed capital into risky but lucrative ventures.  The absence of private-creditor involvement was a striking aspect of the bailout program.  The message to creditors was clear: Be calm; stay put; you will be fully paid.

It is, therefore, not surprising that, over the past four years, private banks have continued lending money to Brazil at double-digit rates of interest: They trusted the United States to bail them out again in case of trouble, and they were right.  It did not have to be that way.  When Mr. Bush took office, the Treasury Department implemented a new strategy: not granting direct aid (such as that given to Mexico in 1994) and refusing to support the IMF rescue packages.  When Argentina started collapsing late last year, Treasury Secretary Paul O’Neill assured the American people that the days of mega-billion-dollar bailouts of failed economies south of the border were over.  Recently, he said that “wasting taxpayers’ money in a country plunged in political uncertainty like Brazil didn’t seem like a very good idea.”  Such statements did not make him popular south of the border, but they made economic and political sense.

Mr. O’Neill, however, did not keep his promise.  When he returned from a four-day whirlwind tour of South American capitals earlier this month, his promise of a $1.5-billion U.S. loan for Uruguay was soon overshadowed by the announcement of the latest IMF bailout package for Brazil, amounting to $30 billion.  For the second time in four years, we were told that the United States “had to act” to prevent South America’s largest economy from defaulting on its public debt, which is close to $300 billion.  That debt will never be repaid, but, on Wall Street, it is necessary to pretend otherwise—and Uncle Sam is footing the bill to maintain the illusion.  This is yet another example of corporate welfare: Most of the IMF largesse will be funneled to Citigroup, FleetBoston, and J.P. Morgan Chase, who will be the first in line to be covered against default.  They have made billions through risky, high-interest investments in Brazil, and they may rest assured that their wager will remain covered.

There is no incentive for the Brazilian government to change its profligate ways if the IMF comes to its rescue every time it is unable to cope with the burden of debt.  As a result, Brazil and other Latin American countries are flirting with radically populist, anti-market, and antitrade futures, which is the exact opposite of the intended effect of the rescue package.

Secretary O’Neill said Washington supported the deal because Brazil had shown that it had “the right economic policies in place to maintain stability so that the economy can continue to grow.” His assurances were echoed by IMF chief Horst Kohler, who declared that “Brazil is on a solid long-term policy trend which strongly deserves the support of the international community.”

That is wishful thinking, however.  The next Brazilian presidential election will be won by one of two leftist demagogues, neither of whom intends to follow the fiscal austerity dictated by Washington.  The Workers’ Party (PT) candidate, Luiz Inacio (Lula) da Silva, and leftist ex-finance minister Ciro Gomes both have big leads in the polls over Washington’s favorite, the government-backed Jose Serra.  The market-friendly policies that seemed to offer the hope of stability and prosperity in the early 1990’s are growing more and more unpopular.  That the new government will not mend its ways is obvious from an op-ed by PT congressman Aloízio Mercadante in the Folha de Sao Paulo on August 13: “The new IMF loan will not solve the crisis by itself . . . Without the re-establishment of external lines of credit, a new deal will only postpone the inevitable and make the nation further indebted . . . ”

New loans to “defend production” and “create jobs” will perpetuate the underlying weaknesses of Brazil’s economic and political system, leading to another bailout three or four years from now.  Until then, however, Wall Street bankers will continue their business as usual in Rio.  Fresh loans and rollovers will be seen as an unceasing source of secure profits, underwritten by the U.S. government.  This is unpardonable.  In domestic financial markets, bankruptcy proceedings and other regulations ensure that, when debtors cannot repay their loans, both the creditor and the debtor share the burden.  Similar arrangements are urgently needed in international debt arrangements, ensuring more immediate private-sector participation and burden-sharing so that public-sector funds are not used simply to repay private creditors.  Creditors must be made to think more carefully about those to whom they lend their money.