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. Last Updated: 07/27/2016

Brazil Congress Moves to Cut Deficit




RIO DE JANEIRO, Brazil -- In a sign that Brazil is finally ready to impose reforms to save its tottering economy, Congress has reversed itself and approved stiff new taxes to reduce an enormous budget deficit.


Legislators' willingness Wednesday to tax civil-service workers and retirees - something they had refused to do on four previous occasions - was a major political victory for President Fernando Henrique Cardoso.


Congressional blockage of key reforms had alarmed international investors and helped trigger a more than 20 percent devaluation of Brazil's currency last week, a step that will drive the country deeper into recession.


Congress approved measures that will reduce losses in social security and take a bite out of a budget deficit that amounts to 8 percent of gross domestic product.


Economists said Cardoso's hard-won victory would go a long way in calming fears that Brazil would undergo a Russia-style collapse, dragging much of the region with it.


This vote alone won't ensure stability. But it was a make-or-break vote on a politically volatile issue at a time when Cardoso, facing soaring interest rates and the threat of a tax mutiny by seven governors, desperately needed a victory.


Cardoso's defeats last month in his legislative initiative to cut the deficit was a principal reason for ebbing investor confidence that led to the devaluation, even after Brazil in November had received a $41.5 billion rescue package from the International Monetary Fund.


"If it hadn't gone his way, this would have been a turning point for the worse, much worse,'' said Luis Fernando Lopes, an economist in S?o Paulo who said Brazil is still perilously close to financial chaos.


Such fears have plagued Brazil since it decided last Friday to let its currency float freely on world markets, after vainly spending nearly $50 billion in reserves to prop it up.


Since Cardoso's inauguration in 1994, his so-called Real Plan has led to Brazilian economic growth and an end to two decades of hyperinflation. The devaluation was a bitter capitulation to a four-year effort to stabilize the real, and his surrender last Friday has raised fears of a return to the inflationary days.