Editor's note: This sidebar has caused a controversy. See Arminio Fraga's letter and Paul Krugman's statement below.
Over the days preceding the appointment of Arminio Fraga Neto, a former fund manager for billionaire speculator George Soros, as president of Brazil's central bank, wild rumors spread through the markets: Brazil was going to default on its debt, close the banks, whatever. The real dropped to barely half its original value. During that time, it turns out, Fraga was negotiating with the government, meaning he knew that no such plan was being devised. At the same time, Soros was buying up large quantities of Brazilian debt at deep discounts. When the weekend passed, the real recovered sharply, partly because Soros was now able to "squeeze" those who had sold Brazilian debt short. Other hedge funds are, shall we say, a bit upset over all this.
Arminio Fraga has written us as follows:
I write to you about the comments by Paul Krugman in a sidebar to a recent column of his in this magazine ("Don't Blame It on Rio ... Or Brasilia Either"). In it, Krugman states that during the week prior to my being offered the central bank presidency by President Cardoso, I "was negotiating with the government" and that meant I knew nothing bad was going to happen to Brazil. At the same time, he goes, Soros was "buying up large quantities of Brazilian debt at deep discounts."
Paul Krugman is a great economist, perhaps the best in his generation. As a journalist, however, he was careless, and I happened to be his unlucky victim. His accusation is false. He did not bother checking with me. I did meet with senior government officials that Wednesday (Jan. 27), but I was not offered any government job, not the least the central bank presidency. I did not have access to any privileged information either. As it turned out, Friday was a chaotic day in the markets, and on Sunday I did get the invitation, which I was honored to accept. These are the facts.
Since then, Krugman has written two notes on the episode, both available on his Web site. In them he states that he does not believe that I am corrupt (thanks, but in my worst nightmares I never dreamed my name and the word corruption would appear on the same page) and that he did not treat me unfairly. I beg to disagree. Whether Krugman thinks it is right or wrong for someone with market experience to take a government post is immaterial. People should be judged by their actions and their record, not by labels of any kind, not by rumors.
Paul Krugman has posted the following statement on his Web site:
A FORMAL STATEMENT ON FRAGA
1. Everything I now know indicates that Arminio Fraga has behaved entirely properly over the past several weeks. He has done nothing that should create distrust.
2. I have no direct knowledge about market activity during the runup to Fraga's appointment. I was given an account of that activity by several usually reliable sources, but cannot document that what they said is true.
3. I had no ill intent in including the now infamous sidebar. I had no agenda against Fraga or even Soros. It was purely there as a part of the story, a part that I had expected to be familiar by the time of publication. It is now clear, however, that I committed a serious error of judgement in saying anything about the matter.
4. I fervently hope that this incident will not cause any difficulties either for Fraga's confirmation or for Brazil's efforts to find a way out of its economic crisis.
5. My apologies to Arminio Fraga for my carelessness.
Two earlier comments are also posted on Krugman's site: