Agreement closer on aid plan for Brazil

A financial package aimed at easing the difficulties facing the Brazilian economy is now very close to agreement, senior bankers said here last night.

The deal, which is widely regarded as a test of the effectiveness of the International Monetary Fund and the other international institutions, is expected to be unveiled by early next week. Final details have yet to ironed out and much depends on the extent to which the US Congress decides to fund the IMF which ends its annual general meeting in Washington today.

However, according to sources, US President Bill Clinton is close to an agreement with the Republican Speaker of the House, Mr Newt Gingrich, on the the contentious funding issue.

Mr Gingrich is said to be keen to allow the funding through but is insisting on certain preconditions. Sources say that payment of the money will probably be sanctioned tomorrow. However, it is still possible that Republican opposition could derail the agreement.

The Brazilian package is said to comprise a number of elements including money from the IMF, the World Bank and the International Development Bank.

Brazil's economy is the ninth largest in the world, twice the size of Russia's, and any collapse would have a much greater effect on the world economy than that of Russia when it defaulted on debts. The US especially would be affected because Latin America is the most important emerging market for US exports.

According to sources in Washington, there is said to be some discussion - as part of the deliberations over the financial package - about an element of bilateral funding between the US and Brazil, which may take the form of a bond issue. It is so far unclear whether this will be along the lines of the Brady Bonds in the early 1990s for Brazil or whether they will be succeeded by future privatisation revenues in Brazil.

The amount is also still under discussion, but Brazil has lost almost $20 billion (£13 billion) in reserves over the last couple of months defending its currency, the real. The US authorities are determined to come up with a credible package for Brazil amid fears that the markets could push Brazil into devaluing. Interest rates are already heading towards 50 per cent in a bid to defend the currency.

A Brazilian devaluation could trigger a round of corresponding devaluations in Latin America and, coming on top of the crisis in the Far East, could severely dent US growth prospects.

Observers say the appearance of Argentine President, Mr Carlos Menem beside Mr Clinton in Washington on Tuesday was designed to boost the confidence of Latin America generally.