Nations Have Become Bank-States

With financial aspects taking a leading role in the process of internationalization of the world's economies, countries have become as vulnerable as banks to the movements of investors.

Nations are ordered above all to avoid losing the confidence of investors. Like banks, they are subject to the "herd mentality" of the owners of money, in the words of a prominent Brazilian analyst, and exposing any weakness can be fatal.

States dispose of the means to distribute the losses among their citizens, such as raising interest rates, a measure adopted by Hong Kong and Brazil, or devaluing the local currency, as has occurred in Mexico, Thailand and other southeast Asian countries.

In first place, the local currency is defended, attracting foreign capital with high interest rates, but with the risk of economic recession. In the second, exports and foreign investment are stimulated by raising the price of currencies, but inflation and monetary instability are aggravated.

In today's global context, international investment banks and reknowned economists have been converted into judges.

Brazil's stock markets experienced relief earlier this month, after a week of accumulated drops of 30 percent, because the U.S. investment bank Merrill Lynch positively evaluated the measures adopted by the government and recommended the purchase of shares in Brazilian companies.

But just days before, a verdict handed down by Morgan Stanley, another U.S. bank, aggravated the capital flight, pointing to Brazil as the new target of speculative attacks, because it presented "the greatest risk under the current market conditions."

Martone explained the phenomenon with respect to Brazil's high current accounts deficit, which accounts for 30 percent of the total deficit of developing countries and 80 percent of Latin America's.

But Hong Kong added a new degree of uncertainty. It was not a predictable target. On the contrary, when the territory hosted the International Monetary Fund and World Bank meeting in September, its economic solidity was recognised as a safeguard against any possible knock-on effects from the southeast Asian crisis.

"Things look pretty complicated now," said the secretary- general of the UN Conference on Trade and Development and former Brazilian foreign minister Rubens Ricupero.

For the first time, the trouble has also affected the stock markets of rich countries, like Japan, the United States and European nations, he pointed out in his weekly column.

In Brazil, this month's financial shock destroyed the government's arguments that foreign exchange reserves of more than $60 billion, equivalent to one year of imports, and a privatization program expected to take in $80 billion over the next three years isolated the economy from any risk.

The Real (the national currency) is a well-defended wall, said President Fernando Henrique Cardoso at the end of October. But the next day, the Central Bank doubled its interest rates, thus admitting the vulnerability of Brazil's currency.

Worldwide financial turmoil increases the power of central banks, which have become decision-making capitals, even above presidents or heads of government in moments of tension. The managers of the state have been converted into banks.