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Brazil's recipe for recovery
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October 28, 1998: 11:59 a.m. ET
Austerity plan hopes to save $23.5 billion in 1999; no currency devaluation
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LONDON (CNNfn) - Brazilian finance minister Pedro Malan Wednesday unveiled a $23.5 billion austerity plan aimed at rescuing Latin America's biggest economy, but relieving the markets which had feared a currency devaluation.
President Fernando Henrique Cardoso indicated the framework for the program in a televised address Tuesday.
The government hopes a program of budget cuts and tax hikes will prevent a punishing currency devaluation.
Malan's plan involves a three-year program to tackle the massive budget deficit and collect an expected $30 billion in emergency support from the International Monetary Fund.
"The current situation is one of unmistakable fiscal bankruptcy," according to the Finance Ministry.
An inflation-slashing economic stability plan in 1994 helped stabilize the economy, turning it into one of Latin America's success stories of recent years.
If Brazil suffers the currency turmoil which has bedeviled Asia and Russia, the whole of Latin America might be thrown into recession.
"If these reforms are not implemented, who knows what is going to happen?" said Rodrigo Pinheiro, an analyst at Old Mutual Asset Managers.
He added though, that he didn't think a bank default would occur, in the near term at least.
Whatever happens, Brazil faces a grim 1999. The economy is expected to shrink by 1 percent next year.
The measures revealed Wednesday included a $7.3 billion cut in the federal budget for 1999 and extra taxes on financial transactions.
Measures likely to be contentious include an increase in the amount civil servants will have to contribute to their pension plans and first-ever social security contributions from retired public sector workers.
The federal government also intends to keep a greater proportion of revenues intended for local municipalities.
The plan, due to be voted on by Congress later Wednesday, is widely viewed as the country's only chance of avoiding economic chaos.
The passage of the plan through Congress is likely to prove troublesome. Some politicians have already voiced their disapproval to such austere measures.
Old Mutual's Pinheiro said political support for the plan would mean "confidence can return to this market, interest rates can come down and Brazil can survive this period." [156 K WAV] or [156K AIFF]
Brazil's stock market delayed its opening to hear Malan's plan. When the Bovespa index re-opened it jumped 1 percent to 6,943. 
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Brazil Stock Exchange
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