Brazilian Public Debt: Who ows who?

30 July 2008 by Gabriel Strautman

Gabriel Strautman is an economist of the Institute of Alternative Policies for the Southern Cone (PACS), member of the Brazilian Network on Multilateral Financial Institutions and of the Jubilee South Network.

The recent announcement of Brazil’s upgrade to the net external creditor position – when a country’s external assets surpass its liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). – was very welcome by the Brazilian Government’s financial authorities as a triumph of our economic policy. According to the government, for the first time and thanks to the high level of our international reserves, we have sufficient resources to pay off the external public and private debt if we wished to do so. That joy, however, is justified only from a strictly political perspective, since from a financial point of view the external debt is today a minor problem, compared to the internal debt, and the payment of both still represents an obstacle to progress on pressing social needs for the country.

According to the Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

, in January 2008, Brazil’s total external debt (both public and private) was US$ 196.2 billion, against assets amounting to US$ 203.193 billion over the same period. This means that, in January, Brazil had a negative external debt of US$ 6.893 billion, which led the country to reach a net external creditor position. Brazilian external assets are mainly made up of the country’s International reserves – which in January amounted to a record US$ 187.534 billion – not counting the US$ 12.864 billion in commercial bank assets and the US$ 2.819 billion in foreign credits. As regards (passive) external debt amounts it is interesting to point out that as from March 2001 the Central Bank excludes from calculations the value of intercompany loans (debts of multinational subsidiaries established in Brazil with parent companies abroad). By adding these loans’ worth – which in December 2003-February 2008 soared from US$ 20.484 billion to US$ 49.926 billion – Brazilian total external debt surpasses US$ 240 billion, an amount which exceeds total assets and contradicts the so-called net external creditor position.

But even without taking intercompany loans into account and accepting the net external creditor position, we are still far from considering the debt issue as problem solved. Evidence of that is the fact that Central Bank estimates for 2008 nominal deficit – final national accounts after debt service Debt service The sum of the interests and the amortization of the capital borrowed. – is 1.6 points of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
. A great part of the national budget continues to be allocated to the repayments and service of the external and internal debts, which represent 30.59% [1] of the general budget of the Union [2] implemented in 2007 [3]. In order to have a notion of proportions, in the same year only 5.17% of budget resources were spent on health, 2.58% on education and 0.41% on science and technology. In spite of financial expenditure regarding the external and internal debts virtually taking in one third of the federal budget, as has just been pointed out, and despite these items being the ones that have grown the most over the last years, they are rarely considered in debates on the necessity to increase public spending efficiency. This observation was made by Ronaldo Coutinho Garcia, of the Applied Economics Research Institute (IPEA) [4]. According to Garcia, the current structure of public spending favours a limited number of families and economic groups with access to the financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. , to the detriment of the majority of Brazilians, who depend on the development of redistributive public policies. Thus, the fact of not acknowledging the payment of public debt service equals to acknowledging the “untouchability of these privileges”, when the untouchable should be the guarantee of the social and individual rights of the majority.

The opposition to external debt payment became the banner of struggle of Latin American social movements and leftist parties after the indebtedness process launched by military governments in the 1970s, and the subsequent debt crisis in the 1980s, brought about by a unilateral increase in US interests, which ruined indebted countries’ finances. Throughout this whole period, the activities of multilateral financial institutions, such as the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF) have been decisive. Whereas the first promoted the indebtedness of peripheral countries in the 1970s, offering easy credit for large infrastructure projects – many of which were questionable – the second was responsible for the imposition of major market liberalization policies in indebted countries, as a condition for access to loans during the 1980s crises. These institutions’ degree of commitment to international capital interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. made them turn into targets of the leftist movements’ struggle as well.

By announcing Brazil’s new net external creditor position, thus suggesting that the debt problem has been solved, the government seeks a political victory, repeating a strategy also used in 2005, when we cancelled our debt with the IMF through a US$ 15.5 billion early payment. For this reason, our debt cancellation with the IMF as well as the so-called external debt overcoming do not have the same meaning in the current political and economic circumstances. The IMF is currently attempting to overcome a legitimacy crisis arisen after the evident political failure of liberal reforms imposed on countries by the institution throughout the 1990s [5]. Notwithstanding the fact that the problem is far from being solved, as it has been already seen through the analysis of the gap in public funds.

Although the external debt appears to be a minor problem, since we have an internal debt at least three times as large. In February 2008, the internal debt reached the astronomical figure of 1.242 trillion reais, which amounts to nearly three times the external debt value estimated in 417 billion reais [6]. If we consider the Central Bank’s open market operations (OMO), that is to say, the placing of securities in the market aiming at the liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. mainly generated by dollars purchase, the internal debt surpasses 1.4 trillion reais [7]. Of the 237 billion reais earmarked from the federal Budget to Brazilian public debt payments and service in 2007, 219 billion were allocated to internal debt payment, against 18 billion allocated to the external debt, which means 12 times as much.

A meteoric expansion of the Brazilian internal debt, closely related to the external debt which led the country to the 1980s crisis, which was multiplied by seven over a decade. After the Real Plan implantation in 1994, the increase in imports following the immediate appreciation of the Real resulted in the country’s trade balance Trade balance The trade balance of a country is the difference between merchandize sold (exports) and merchandize bought (imports). The resulting trade balance either shows a deficit or is in credit. deficit. This imbalance had to be made up for by attracting hot money, which came into the country for the purposes of making a profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. through one of the highest interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
worldwide. One of the ways out suggested by Brazilian economic policy agents was turning the public debt – resulting from the intense external indebtedness process in previous decades – into securities negotiable in the financial market [8]. Thus, many of the external creditors became “internal”, a process which is increasingly intensifying the more acute the recent valorization trend of the Real against the Dollar [9] becomes.

Between 1978 and 2007, our external debt which was US$ 52.8 billion soared to US$ 243 billion. In the same period, we paid US$ 262 billion more than what we borrowed. Therefore, the relation between the current internal debt and the debt generated over the years of dictatorship and restructured many times during the democratic period means we continue paying for an illegitimate debt that has been already paid up. If we consider, additionally, the incalculable environmental liabilities resulting from major projects financed with debt resources, we will come to the conclusion that we are the true creditors of that debt. We should, therefore, abide by the 1988 Federal Constitution which, in its 26th article, in the transitory provisions section, determines the carrying out of an external debt audit, which would open an opportunity to restart the debate over the burden of debt service on the budget. And that is exactly what the Ecuadoran Government is doing, led by President Rafael Correa, who in 2007 set up an Integral Public Credit Audit Commission (CAIC) under the responsibility of the country’s Ministry of Finance, with an aim to analyse and assess the indebtednes process in 1976-2006 [10].

The work develops in order to give a detailed account – not only to evidence the economic and financial impacts, but also to reveal the environmental impacts derived from the indebtedness process. This means the auditing will aim at identifying interest rates, commissions and penalties imposed, often in an unilateral manner in credit agreements – thus violating the sovereignty of borrowing countries – as well as the consequences of the conditionalities assumed in loan agreements regarding the population’s living conditions. Thus, the relation between the goal of a financed project and the social and ecological impacts resulting from same will be analysed, from a multidisciplinary perspective and with a broad approach, which help to prove and make visible the claimed debt’s illegal and illegitimate character.

We observe with great expectation the developments in the Ecuadoran auditing process, with the hope of following its example in the near future. We expect the strength of its results will pave the way for restarting the debate over the debt burden on the Brazilian society, and that we may, in a wider perspective, change the current perception by proving that nations are the true creditors of that debt.


[1If taken into account the rescheduling payments (repayments with debt financing), the percentage increases to 53.2% of the budget implemented in 2007.

[2Reference to the Brazilian national budget (TN).

[3Figures taken from the third edition of “ABC da Dívida”, available at for whom, curiously, debts service, commissions and repayments are “untouchable, unpronounceable, nonexistent for fiscal policy, even if they are a heavy burden”

[4Garcia, R. G. “Despesas correntes da união: visões, omissões e opções”. Brasília: Ipea, jan. 2008 (Paper for discussion nº 1319)

[5It is odd to see how despite debt cancellation with the IMF, which frees us from the conditionalities imposed by this institution, we continue faithfully abiding by the same orthodox economic policies of the past. The best example of that is the effort to generate huge fiscal surpluses, which produce the resources for debt payment.

[6This figure was turned into reais for the purposes of its comparison with the external debt. This figure includes intercompany loans.

[8Fattorelli, M.L. and Ávila R. “A dívida e as privatizações”. Available at

[9“In 2007, the value of the Real rose 20% against the dollar. Therefore, the foreign investor who brought dollars in the beginning of 2007 in order to invest in Brazilian internal debt instruments made an average 13% profit in interest, plus 20% when they changed their profits into dollars. Subsequently, in 2007, foreigners gained an actual interest rate (in dollars) amounting to over 30% annually”. Ávila R. “A dívida não acabou”. Available at .

[10“Auditoria Já!” Nº 0, available at



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