Eight years of rapid relative GDP growth in Brazil has made debt crisis there a distant memory.
Emergence from debt crisis has brought Brazil to a leadership role in the developing world.
The crisis conquered has parallels to today's Greek concerns—in some ways more severe.
The central question confronting Greece is whether it becomes Brazil in the future…or Greece.
Brazil today is an economic growth rock star. Vast natural resources, mostly free-market friendly government (particularly compared to her neighbors), and big per capita income gains have driven GDP growth well ahead of the global average the past eight years. This continues today—positively impacting Brazilians and others overseas.
Reported yesterday, Brazilian retail sales for March rose a whopping 15.7% over last year—ahead of already high estimates and continuing a robust trend from 2003-2007. Amazonian families now fret their teens becoming mall rats at local shopping malls that were but a pipedream only a decade or two ago! Economic development yields a fast-growing and hungry consumer base. Demand for raw materials globally has driven the country's growth for years, including the rebound from recent recession. Meanwhile, Brazil's government has been quite friendly to capitalist development, a change from a more populist past.
It hasn't always looked this rosy. Eight years ago, Brazil faced 25%[i] interest rates, massive government spending, and the risk of intentional debt default steered by a left-leaning President-elect. A history of default and currency devaluation spurred fears drove canyon-sized credit spreads versus US Treasuries. In size, Brazil's debt was $335 billion—almost as large as Greece's entire GDP today! In many ways, Brazil's sovereign debt crisis then was worse than Greece's today.
The widely feared new president, Lula, ramped up a very difficult program of privatization and austerity[ii]—like capping and taxing public sector pensions, which represented approximately 4% of GDP. Key to economic development, he also moved to make credit more available to households and businesses alike. Brazil received $30 billion in aid from the IMF to help quell the crisis, which investors feared insufficient. High interest payments and unpopular reform weren't easy—but helped position it well for economic revival. The commodity-driven global boom from 2003-2007 was perfect medicine, largely creating the developing economic power we see today. Brazil is no longer synonymous with "hyper-inflation," but with growth, opportunity, Olympics, and, ok, the girl from Ipanema.
Brazil's growth has downstream effects on developed countries' economies too. Believe it or not, Greece's second largest industry—shipping—is a beneficiary of fast growing emerging markets like Brazil. (Evidence that Greece faces problems, but there are parts of its economy that function fine and even thrive. Also note that Greek shipping is exempt from corporate taxes—always a nice plus for earnings.)
Today, Greece confronts issues Brazil faced years ago and success depends in large part on whether they are willing to follow through on austerity measures passed. Cuts aren't easy, but participating in global recovery is critical. Greece shares Brazil's history of debt crises—Greece has been in default 50.6% of the time it's been independent! A dose of economic vibrancy also will help Greece along, and fortunately an economic recovery globally is there to help. The question now is whether they follow through to become another Brazil…or another Greece.
[i] Source: Thomson Datastream
[ii]For further reading, see Fisher Investment on Emerging Markets, by Austin Fraser, John Wiley & Sons, 2009.