ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The 1999 Brazilian Financial Crisis

The path to the 1999 financial crisis in Brazil started with a massive surge in inflows, but the scene was soon dominated by the high domestic interest rates, initially necessary for price stabilisation but later becoming permanent to avoid "another Mexico" and to respond to continuous external shocks. But these high interest rates soon created massive domestic financial fragility in the banking sector and in state government finances, leading to an increase in public debt through continuous private banking and state government rescue activities. And this public debt exploded due to high interest rates, which became systematically higher than both the growth in public revenues and the returns on reserves. In the meantime, the real economy imploded because of these rates, but high interest rates became even more necessary as a (poor) substitute for missing public sector reforms and as a price for political stalemate. It then did not take much (the Russian devaluation and default in August 1998 and a relatively minor internal political crisis at the beginning of January 1999) for Brazil to end up in a major financial crisis.

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