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English Report

Toward the end of 2005, the government began anticipatory payments on some parts of the foreign debt. In December of 2005, it paid $15.5 billion to the International Monetary Fund (IMF); in the beginning of 2006 it also eliminated the debt with the Club of Paris (association of creditor governments), paying $1.8 billion; and paid another $6.64 billion in reserves to redeem Brady bonds.  Recently, the government announced that it would continue redeeming more bonds to pay down the foreign debt, activating those that should total $20 billion in 2006. The most troubling is that all of the social sacrifice happened in order to reach the growing limit of primary surplus was not sufficient to impede the explosive growth of the federal domestic debt in the last years. Brazil produced a surplus of 3.89% of the GDP in 2002, of 4.25% in 2003, of 4.58% in 2004, of 4.84% in 2005, and of 5.39% of the GDP in the first seven months of 2006, when the internal debt reached R$1.109 trillion reais.

Foreign Debt and Human Rights Violations in Brazil

Maria Lucia Fattorelli Carneiro[1]


For how many decades have millions of Brazilians suffered from the absence of basic social rights, justified by the notion that there are insufficient tax revenues to care for them?  How many people died from lack of medical assistance?  How many youth condemned to a future devoid of hope because they did not have access to education or to a job? 

On the other hand, there was no lack of tax revenue for the payment of the financial debt – internal and external. This is not postponed, like the social debt, for the financial markets cannot overlook anything. The government’s generosity has been extreme for the financial debt: we pay the highest interest rates in the world on the internal debt, and make advanced payments on the foreign debt.

In this article, we demonstrate how the management of the public debt hurts human rights. We will unmask the false propaganda that “the Brazilian economy is doing well.” In truth, the debt continues to present explosive growth – even with advanced payments – further prejudicing the poor, through the model of tributary injustice, by the reduction of social expenditures and owing to the practice of very high interest rates, which foment unemployment, low salaries and violates basic social rights.

Advanced Payments of the Foreign Debt and the Growth of the Internal Debt

Toward the end of 2005, the government began anticipatory payments on some parts of the foreign debt. In December of 2005, it paid $15.5 billion to the International Monetary Fund (IMF). In the beginning of 2006, it also eliminated the debt with the Club of Paris (association of creditor governments), paying $1.8 billion; and paid another $6.64 billion in reserves to redeem Brady bonds.  Recently, the government announced that it would continue redeeming more bonds to pay down the foreign debt, activating those that should total $20 billion in 2006.

The government thinks that these advanced payments will reduce our foreign vulnerability. However, the reality is far from this propaganda.  In the first place, these advanced payments constitute a small part of the foreign debt. At the same time in which these advancements were made, the government accelerated the emission of new bonds of the foreign debt, with higher interest rates than the debts paid off in anticipation, having released, only in the year 2005, close to $14 billion, when the amount owed for the year was $6 billion[1]. When the rates determined by the IMF were 4% on the year, and the Brady titles 5.7%, the rates of the bonds released since January of 2005 averaged rates of 8.5%.  Or as it were, they paid in advanced the cheaper debts and took on new more expensive debts.

Aggravating the situation, all the new bonds of the foreign debt released since 2003 brought a “Clause of Collective Action” (CAC).  This clause transferred to the Court of New York the resolution of any controversies over the debt, which violates our national sovereignty.  The CAC also permits the major creditors (who own 85% of the debt) to impose their will on an eventual renegotiation of the debt, which concentrates power with creditors and also limits national sovereignty.

These advanced payments also represent an exchange of the foreign debt for “internal debt”, which has the highest short term interest rates in the world.  This exchange of foreign debt for domestic debt takes the following form: to gather the dollars to pay the foreign debt in advance, the Central Bank (BC) has purchased dollars from the market. Therefore, when the BC buys dollars, it injects reais (Brazilian currency) into the economy, which, in the vision of the government, causes inflation.  This way, to restrict this excess of reais in the economy, the government releases bonds on the “internal debt”, in equal value. From October of 2005 until July 2006, the Central Bank purchased $30 billion US dollars, which resulted in the release of nearly $66 billion in Brazilian reais of bonds for the internal debt (considering the exchange rate of R$2.2 per dollar).  It is not toeing the line to say that the internal debt presents explosive growth: already surpassing the mark of R$1.1 trillion, having grown at least R$107 billion in the first seven months of 2006.

These $66 billion reais spent on the acquisition of dollars by the Central Bank in this short period, and used to recycle part of the foreign debt into domestic debt, could have been used to double the sum of expenses on health, education, land reform, public security, urbanization, housing, sanitation, culture, science, technology and energy in 2005.

Another onerous mechanism that the government has used to advertise a supposed reduction in the country’s vulnerability to foreign economic influence is the so-called “operation of reverse swap”, performed by the Central Bank.  The name of the operation is complicated, but its principle is very simple. With these operations, the government changes foreign debt indexed to the dollar for internal debt indexed to Selic, with the highest interest rate for reais in the world. Such operations represent a paradise for foreign investors, which include exemption from taxes in order to buy bonds on the Brazilian domestic debt. Therefore, if the dollar falls, they earn from the change of the dollar value, without the interest.

The costs of these swap operations, which actually total more than R$ 30 billion, allied to a policy of high interest rates, are the principle factor responsible for the largest loss of funding registered by the Central Bank in the last years: R$10.45 billion in 2005, and R$12.5 billion in the first half of 2006.  All these losses to the public budget should be audited, since there is evidence of the transfer of public funds to the financial sector. In the same periods in which the Central Bank registered such losses, the commercial banks had the highest profits of all time: R$ 33.8 billion in 2005, and R$22.2 billion in the first half of 2006.

Fonte: Banco Central

When the financial debt is highly remunerated and paid in advance, the social debt is postponed

Figures of the newly released PNAD – National Research for Domestic Trends – demonstrate the immense social inequality of the country, with alarming numbers: the earnings of the average worker, in decline since 1996, had swift improvement in 2005, attaining R$ 805 monthly, but still is 15.1% less than that of 1996. The rate of illiteracy reached 10.9% among people older than 15; 18% of adolescents between 15 and 17 years old were out of school in 2005, which means that 1.9 million teens were not in school last year. Child labor is a reality in the life of 11.8% of children and youth between 5 and 17 years old; 29.6% of the residences in the country do not have sewage systems, and 86.1% of the families do not have Internet access.  The PNAD still indicates the rate of unemployment is near 10%, even though other sources have suggested a rate of 18.01% in 2005.[1]

Other numbers show human rights violations in the country: housing deficits of more than 6 million residences, 4 million families of landless farm workers, and a growth in the number of urban slums.  Hunger is a reality which affects more than 56 million Brazilians, who survive with earnings as low as R$ 79 per month![2]

The main social program implemented by the government is the “Family Scholarship” Program.  This program distributed R$64 monthly for 11 million participating families. But the causes of poverty, such as unemployment, the low minimum wage, and the deficiency of public services, like healthcare and education, are not addressed by the program. Remarkable social injustice has provoked an increase in criminality and violence.  Drug trafficking has emerged as a form of subsistence for many families, provoking a sad change in social relations.

The difficult situation of the majority of Brazilian people is explained through the figures of the public budget. From 2003 to 2005, the federal government exclusively applied to the interest of the debt (without considering the values paid for paid-off bonds) R$230 billion, which is equivalent to 2.4 times the expenditure on healthcare in the same period, or more than five times the expenditure on education, or more than 30 times the expense on land reform over three years.

In the period between January and July of 2006, the federal, state and municipal governments generated a primary profit equivalent to R$62.8 billion or 5.39% of GDP (Gross Domestic Product, or as it were, all wealth that the country produced during these seven months). This amount was not sufficient to pay the interest on the debt, which accounted for 8.16% of GDP in the period. This means that from each R$100 of all earnings produced by the country in these seven months, R$8.16 was needed to pay the interest on the debt.

    In analyzing the execution of the federal budget during the first half of 2006, we can see the distribution of revenue (R$347 billion). The disbursements to service the debt (interest plus amortization, excluding refinancing) consumed 34.36% of the earnings of the period, and were much greater than expenditures on fundamental social needs, like healthcare, education and social assistance.  Even with this, it almost voids the value assigned to important sectors like agriculture organization (with less than 0.19% of expenditures), transportation (0.16%), science and technology (0.26%), and housing and sanitation (0.00%).

Auditing the debt

The alternative we propose to resolve this problem is a profound investigation of this process of debt accumulation, which, despite changing appearance, continues to be the largest obstacle to development in the country. The debt consumes the majority of resources that should be destined towards guaranteeing a dignified life for all Brazilians.

An audit of the External Debt is permitted within the Federal Constitution of 1988, in article 26 of the Act of the Transitional Constitutional Dispositions, though up to today it has never been done. As this official audit has not occurred, a “Citizens’ Audit of the Debt” is being carried out within the Jubilee South movement since April 2001. The objective of this movement is to analyze the process of Brazil’s debt accumulation, to reveal the true nature of the debt, and to give more visibility to this issue, both nationally and internationally.  This Citizen’s Audit will develop actions to pressure for an official audit.

Beyond the rescue of documents relative to the historical experiences of 1931 (audit performed by the government of Getúlio Vargas), 1987 and 1989 (Commissions formed by the National Congress), various projects have been carried out by the movement, which are available at the site 

We calculated the impact of unilateral increase in interest rates by the United States, beginning in 1979, which provoked the financial crisis of the 1980s, the results of which represented the principal cause of growth of the external debt in Brazil.  In 1978, the external debt was US$ 58 billion.  Up to 2005, we paid US$ 241.7 billion, more than that which we received in loans, and, even so, the debt multiplied, leaving us still with US$170 billion to pay. If the interest rates had been maintained at 6% per year since 1978, including the interest and amortizations paid since then – new loans already discounted – we would have paid off the entire debt by 1989. Counting the transfers sent abroad since then, this would have currently made us into creditors of US$ 211.8 billion.

Researching the external debt, we demanded access from the Federal Senate to the contracts related to such operations, on the basis of the disposition of article 52, line V, of the Federal Constitution. Barely 238 debt contracts were located in the archives of the Federal Senate, corresponding to the 815 resolutions that had been informed previously, suggesting the fact that the contracts are not always available for the analysis of the senators, who need to approve these operations.  The contracts we found represent US$ 42.7 billion, or barely 20% of the debt between 1964 and 2006.  

None of the debt contracts signed by the federal government during the military period had the approval from the Senate—the body which is responsible for the approval of all external loans.  According to the few contracts available in the Senate, fluctuating interest rate occurred in more than 92% of the financed value; clauses of renunciation of sovereignty, and definition of a forum abroad for resolution of litigation, occurred in 49% of the contracts; and 38% of the resources obtained obliged Brazil to adopt macroeconomic policies dictated by the International Monetary Fund or the World Bank. 

The high and fluctuating interest rates of the “internal debt” also must be questioned. In the financial crises of the 90s, this rate, in a matter of days, was fixed at more than 40% per year, and remains the highest in the world, almost double that of the next country in the “ranking”. This characterizes an illegal management of public resources.  In addition, diverse operations of the World Bank should be audited, such as the “reverse swaps”, and the anticipated purchases of deeds, for being a scandalous privilege to investors.  The relations between members of COPOM (a governmental body that determines official interest rates) and the Financial Market should also be investigated.

The audit of the current debt stock is necessary to prevent the explosion of the debt.  Without an audit, the current debt stock – a product of innumerous irregularities – would continue to grow.

In the end, the audit is an important political tool that should be deepened, as it could consolidate the fight against the economic domination exercised by the debt. It gives support to our arguments, by showing evidence of illegitimacy and illegalities in the process of debt accumulation suffered by not only Brazil, but also the majority of the countries in the Southern Hemisphere.

The audit is a flag that can be raised by many countries.  The search for information and data will promote the strengthening of the fight against the Debt across the world, representing an important step towards showing that it was not a simple coincidence that our countries have applied similar economic policies.

[1] The number of 18.01% unemployment was obtained together with DIEESE.  Elaboration based on the average unemployment rate of 6 Metropolitan Regions (São Paulo, Distrito Federal, Porto Alegre, Salvador, Recife and Belo Horizonte), pondered by the PEA for each metropolitan region.  The DIEESE measures unemployment through methodology more adequate to Brazilian reality, as it includes hidden unemployment such as informal work or discouraged work. 

[2] “Map of the End of Hunger II”, from the FGV, 2004, base don the Demografic Census of 2000.

[1] The value of US$ 14 billion includes  the US$ 1,5 billion emitted ahead of time in 2004, but refer to the budget goals of 2005.

[1] Fiscal Auditor of the Federal Budget, Second Vice President of the Unafisco Sindical and Coordinator of the Citizen Debt Auditor for the Jubilee South Network.