Finance minister wins support of cautious U.S., IMF

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• Markets react favorably
• Cardoso given ultimatum over state debts
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WASHINGTON (CNN)-- In an attempt to regain investor confidence, Brazilian Finance Minister Pedro Malan said Monday that his government would increase interest rates and work to establish a sound fiscal policy in order to keep its currency from sinking any lower.

Concluding a three-day emergency meeting with the International Monetary Fund in Washington, Malan said he convinced the IMF that the real, Brazil's currency, should continue to float.

"We have eliminated some alternative options such as currency boards and redefining a band with a large fluctuation and (trying) to defend it, and we have taken a decision towards a float," said Malan.

Malan denied allegations that Brazil, which boasts the world's eighth largest economy, would ask for an advance on a $9 billion disbursement of IMF funds scheduled for next month. He said Brazil is now in a "new world" with the new monetary system, and there would be no need to replenish its reserves with IMF funds.

Last November, the IMF, along with the World Bank and United States, assembled a $41.5 billion support package for Brazil in hopes of preventing that country from falling victim to the same currency troubles that have leveled a number of Asian nations and Russia beginning in mid-1997.

Brazil already has received $9 billion from the IMF package, and another $9 billion is scheduled for the end of February.

Markets react favorably

In addition to meeting with IMF and World Bank officials, Malan met with U.S. Deputy Treasury Secretary Lawrence Summers, the Clinton administration's point man on the global currency crisis, and Federal Reserve Chairman Alan Greenspan.

The real took a 21 percent plunge against the dollar since the government's unexpected announcement last week that it would no longer prop up the currency.

On Wednesday, the government tried to carry out a controlled devaluation of just more than 8 percent. Investors began to panic, however, and markets around the world began to fear another Asian-style currency crisis.

The Central Bank let the real float on Friday and on Monday said it would adopt a free float for good. Markets in Brazil and the world reacted favorably to the news. In Sao Paulo stocks ended 5.43 percent higher at 7113 points on Monday.

Monday's dollar flight, a key indicator of investor feeling, was estimated by traders at around $400 million, compared with almost $2 billion last Thursday.

The global chaos that many predicted would follow a Brazilian devaluation failed to materialize. But the fall of the real deprived Brazil of its main weapon in a five-year fight against inflation, raising the prospect that prices could rise again.

Malan said inflation would probably reach 6 percent to 7 percent this year after deflation of 1.8 percent the year before, still a far cry from the 2,000 percent yearly inflation that haunted Brazil's 160 million people just five years ago.

President Fernando Henrique Cardoso dismissed the possibility of a sudden leap in inflation, saying Brazil could attack higher prices for imports paid in dollars by cutting import tariffs.

"Nothing justifies going back to the inflationary spiral," the president said at a news conference.

Cardoso given ultimatum over state debts

Adding to the unpredictability of the Brazilian economy, a group of seven rebel governors, led by former President Itamar Franco, on Monday handed Cardoso an ultimatum over their debts, saying he had until February 5 to respond to renegotiation demands.

Franco's declaration earlier this month of a moratorium on debt payments to the federal government from his state, Minas Gerais, helped spark the large dollar outflows that forced the real's devaluation.

Minas Gerais owes $15 billion to the central government and together with the other 26 states, they owe the government $110 billion.

Brazil has the largest economy in Latin America. Its outstanding debt to the IMF is more than $275 billion, 70 percent of which is owed by the private sector.

The Associated Press and Reuters contributed to this report.