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May 2003

Trying to Gag Lula

By creating phony crises, the media is falling into the hands
of those who profit from this volatility—the speculators,
many of which are the big Brazilian banks. A free news
media is essential in any democracy, but much of
what the media produces is of little or no value.

John Fitzpatrick

Mid-May, President Luiz Inácio Lula da Silva was criticized by a section of the local media for commenting on the exchange rate. One week later, Vice-President José Alencar also came under fire, for commenting on interest rates. While Lula expressed concern at the possibility of Brazil's currency, the real, falling against the U.S. dollar—thereby affecting Brazil's export boom—Alencar made a guarded criticism of the Central Bank's decision to keep the benchmark interest rate at 26.5 percent.

Both leaders should ignore this media assault, and voice their views as openly as the columnists who make a living publicizing their opinions. The media is not only being naïve and hypocritical, but is playing into the hands of vested interests by exaggerating the importance or griping whenever Lula—and now Alencar—says anything which the media feels might rock the boat. A president cannot be expected to spend his term of office walking on eggs. Problems will not go away by pretending they do not exist.

At the moment, the country is split into those who believe interest rates could be cut without leading to a resurgence of inflation, and those who feel that inflation is still a threat. The former are probably a majority. Despite this, much of the media recommends a softly, softly approach. In their view, Lula must not open his mouth and say anything that could upset the market and adversely affect the exchange rate, the Brazil risk, the upturn in the stock market and other key indicators.

This would be reasonable advice if it were proven to work, which hasn't been the case. Since the start of his administration, Lula and his cabinet have shown discretion. While this approach may have prevented matters from getting worse, it has not prevented volatility, which is as much part of Brazilian life as Carnaval. It is like one of those never-ending novela soap operas: on Monday, the market is euphoric, the real has strengthened, the Brazil risk has fallen, the Bovespa (São Paulo Stock Exchange) index is up; on Tuesday the market is disappointed, the real has fallen back, the Brazil risk has risen, the Bovespa index is down; on Wednesday, the market has recovered, the Real is up, the Brazil risk is down ad nauseam…

Media Plays the Speculators' Game

Journalists and analysts always come up with explanations for this topsy-turvy madness—housing statistics in the U.S., the inflation outlook for São Paulo, a successful debt issue made by a Brazilian bank abroad, a drop in oil prices and so on. We, the readers, are expected to believe that the Brazilian economy will rise or fall on such incidentals, and that if Lula were to voice the sensible opinion that interest rates are too high, then the whole economy will collapse like a pack of cards.

By highlighting matters like these and creating phony crises, the media is falling into the hands of those who profit from this volatility—the speculators, many of which are the big Brazilian banks we pass in the street every day. A free news media is essential in any democracy, but much of what the media produces is of little or no value. Most news stories are as much of a commodity as an orange or a lump of iron ore. Newspapers or magazines need to fill a certain number of pages and, since there is often no real story around, journalists inflate the importance of weak material.

In the U.K., journalists refer to these quiet periods as the "silly season". Let me give an example of how the system works. In the early 1990s I worked as a correspondent for a financial news agency in Zurich, and had to provide running stories throughout the day. An item ahead of the opening of the stock market might have the headline "All eyes on Nestlé's quarterly results", implying that when these results were revealed, the whole stock market would somehow respond dramatically.

Where did this information come from? Well, in the 10 hectic minutes I had in which to meet a deadline, I had been unable to talk to more than one trader. The one I finally got hold of had less than a minute and said something like: "Oh yes, we're waiting for the Nestlé quarterly figures. Goodbye."  Since I had no other material I would write something like "The Swiss stock market is awaiting Nestlé's quarterly results, which are due to be announced at 11 a.m. The market closed down yesterday in light trading due to etc." The rest of my story was a rehash of the previous day's closing piece, which, in turn, was based on similar quotes, grabbed from anyone who had a spare moment to talk to me. For any serious investor, my stories were of no value whatsoever.

Covering the foreign exchange and bond markets was even worse in terms of getting reliable information. When option expiry dates were close, no one knew what was happening. People would spread rumors* to try and push up the price of a share, while others were trying to push it down. In some cases traders were betting either way. At other times, analysts would release reports on companies that invariably had "buy" recommendations. These would be followed by road shows and presentations, in which glowing reports would be made of companies or sectors.

The press dutifully printed this because it had to print something. Last year, the CEO of the Financial Times criticized journalists for failing to foresee the Enron crisis. She lamented the lack of specialized knowledge which, she claimed, meant the journalists had not been able to interpret balance sheets. The lack of time, rather than specialized reporters is, I think, a more likely explanation.

"F—ing bond salesmen on Wall Street"

When Bill Clinton started his first term of office, economic advisers told him that the most important indicator was the market price of 30-year U.S. treasury bonds. He was advised to bear this in mind, and be careful of saying anything that could adversely affect market prices. Clinton was reportedly astonished and said something like: "You mean I have to govern the country thinking of what is good for a bunch of f—ing bond salesmen on Wall Street?" "Yes, Mr. President," replied the talking heads**.

Clinton got round this issue by appointing as his treasury secretary, Robert Rubin*** who, as Co-Chairman of Goldman Sachs, could presumably handle the "bunch of f—ing bond salesmen on Wall Street." After that, Clinton, the Democrat, could sit back and let Rubin handle all the crises that came his way in a way that, ironically, Bush, the Republican, has failed to do so far.

The point I am trying to make here is that comments by Lula or Alencar make no difference, as long as the economy is in "safe" hands, meaning hands the market trusts. These "safe" hands currently belong to Finance Minister Antonio Palocci, who has Lula's complete confidence. Palocci has been playing the Wall Street bond salesmen's game, as did his predecessor, Pedro Malan. Central Bank President, Henrique Meirelles, is doing likewise, as did his predecessor, Arminio Fraga. In a globalized economy, in which capitalism has no rival, Brazil has no other choice.

The decision by the Central Bank to maintain the basic interest rates at 26.5 percent was applauded by the market. Why? Because, according to the Brazilian media, the decision showed that the Central Bank would not give in to political pressure to cut rates. If you believe that, then you believe anything…

A week before the decision, during a visit to Spain, Meirelles made it quite clear that rates would not be cut. This led to a hyped build-up to this week's meeting of the monetary policy committee, known as COPOM. One member was quoted as saying the committee was coming under tremendous political pressure to lower the rate. Conventional wisdom had it that any backtracking by the COPOM would put the Central Bank's credibility in question, and hold back the prospect of it gaining greater autonomy.

It is now clear that the whole episode was exaggerated, if not prefabricated to give the impression of an independent-minded body taking the right decision for the long-term good of the country, rather than caving in under pressure. However, the press does not seem to realize this and, at the time of writing, the saga is continuing.

Alencar—Vice President with a Face

As for Alencar, he has been consistently critical of Brazil's interest rates, which are among the highest in the world. The base rate of 26.5 percent rises to around 60 percent when other elements, such as bank profits, administration charges and taxes are added.

Alencar is a successful businessman and has hands-on experience of the problems of investing when credit is so costly and scarce. Since Alencar is also only a heartbeat away from the presidency should anything happen to Lula, then it is good to know his opinions and style. He is certainly an enormous contrast to his faceless predecessor, the skeletal Marco Maciel, who looked like a Harry Potter villain and was virtually unknown to the public.


* "A rumor's just a premature fact" says one of the characters in the film version of the book Barbarians at the Gate: The Fall of RJR Nabisco. Oh, no, it's not…

** I cannot remember exactly where I read this, but it may have been in the book by Clinton's press spokesman, George Stephanopoulos, All Too Human: A Political Education, released in 1999. I would be grateful if any reader could confirm this, or provide me with the source.

*** Robert Rubin is currently Chairman of the Executive Committee of the Board of Directors at Citigroup.


John Fitzpatrick is a Scottish journalist who first visited Brazil in 1987 and has lived in São Paulo since 1995. He writes on politics and finance and runs his own company, Celtic Comunicações—  www.celt.com.br, which specializes in editorial and translation services for Brazilian and foreign clients. You can reach him at jf@celt.com.br  

© John Fitzpatrick 2003

This article appeared originally in Infobrazil, at www.infobrazil.com




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