by Richard Barley
Wall Street Journal
May 24, 2011
There are two common beliefs about Greece: first, that it's inevitable it will default on its debt at some point, and, second, that it's incapable of sticking to the overhauls needed to avoid default.
That denies the capacity for change. By 2002, investors were similarly convinced Brazil would abandon overhauls and default, but that belief proved misguided.
Brazil spent the 1980s and 1990s battling hyperinflation and structurally lagged behind its peers in Latin America. Even after cracking the inflation problem, in 1999 it was rated below Venezuela and Argentina. In 2002, its 10-year dollar-bond yield hit 22% amid fears an incoming left-wing government would relax policy. But then-President Luiz Inacio Lula da Silva surprised investors by sticking with his predecessor's overhauls and avoiding default.
Some argue Greece stands no chance as it cannot devalue. But Brazil's 1999 devaluation of the real was no panacea and didn't avoid a crisis; monetary and fiscal policy had to be tightened to restore confidence. Brazil ran a primary budget surplus, which excludes interest payments, of over 3% of gross domestic product for 10 years starting in 1999. In 2000, it passed a law mandating primary surpluses at all levels of government. It also carried out a $100 billion privatization program in the 1990s that helped pave the way for increased private investment and wider economic liberalization.
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