The financial crisis that swept through Asia and Russia has turned its gale-force winds on Brazil. A different approach is needed, one that allows the currency to find a more realistic market value and that takes steps to prevent either a panicked flight by Brazil's creditors or a bailout. Getting things right is important.
Brazil is the world's ninth largest economy.
It accounts for about half of the output of Latin America, a region which purchases some one-fifth of American exports. A disaster in Brazil would surely rattle the world economy and further tarnish the credibility of the United States and the I.M.F. Many commentators have argued that Brazil's economy is fundamentally sound and just needs a fire wall against the Asian crisis. The reality is that Brazil faces serious problems. The public sector deficit is huge, approaching 8 percent of Brazil's gross domestic product. In addition, Brazil's currency, the real, is overvalued by at least 25 percent, and perhaps much more.