US treasury secretary visits Brazil

Treasury Secretary Paul O'Neill on Monday assured Brazil's president of Washington's support in its negotiations with the IMF.

O'Neill met President Fernando Henrique Cardoso here for what he described as "cordial and very useful" talks about how to help Brazil cope with its worst financial crisis since the sharp devaluation of its currency, the real, in 1999.

With investors increasingly nervous that October elections could end in victory for a left-wing candidate, the real has plummeted to record lows in recent weeks. That has aggravated a credit crunch on international markets that is squeezing Brazilian companies so hard that many analysts predict a rash of corporate defaults. As the crisis worsened, Brazil last week dispatched negotiators to Washington to lobby for IMF support.

"I repeated President Bush's strong support for Brazil," O'Neill said after meeting with Cardoso. "We support the discussions the Brazilian authorities are now having with the IMF."

"As the largest economy in Latin America, Brazil's success is important to the economic success of the entire hemisphere," O'Neill said. "Brazil has the right economic policies in place to maintain stability."

Last week, O'Neill was less than enthusiastic about coming to Brazil's aid. He helped add to the market panic by suggesting there could be no fresh aid to recession-racked Latin American countries unless there were guarantees the cash would not be stolen by corrupt government officials.

Those off-the-cuff remarks infuriated Brazilian business executives and sparked a diplomatic spat. Brazil's foreign ministry summoned the US ambassador, Donna J. Hrinak, to explain the remarks and the weekly business magazine Isto E Dinheiro put the O'Neill on its cover with the headline "O'Neill, Brazil doesn't want you here."

O'Neill praised economic reforms that Cardoso introduced over the last eight years. Those reforms have have brought stability and foreign investment.

Brazilian officials who met with the treasury secretary when he arrived in Rio de Janeiro on Sunday night were upbeat about the visit but none risked predicting the outcome of the talks with the IMF. The real failed to rally on Monday, closing at 3.17 to the dollar, more than 5 percent off Friday's close.

Many analysts are skeptical that the IMF will provide any fresh funding without a pledge from all the election candidates to continue a tight fiscal policy and to try to keep inflation low. But the two leading candidates, Luiz Inacio Lula da Silva of the Workers Party and Ciro Gomes of the Labor Front, have refused to make any such pledge, saying the economy is the government's responsibility until after the elections.

O'Neill will now head for Uruguay and Argentina, two more of the region's crisis-hit economies. The US has agreed to provide US$1.5 billion in bridge financing to Uruguay to keep its banks afloat until additional IMF loans can be arranged, but it has yet to help Argentina, which defaulted on its US$141 billion debt in January.

The hastily assembled aid package for Uruguay has been seen by some analysts as an easing of the Bush administration's philosophical opposition to bailing out collapsing emerging markets, unless, like Turkey, they are of strategic interest in the war against terrorism.