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Brazzil - Economy - August 2004

Troubled Waters at Brazil's Central Bank

Aside from a possible change of command of the Central Bank, there
are no pending factors that would immediately alter the market's
favorable view of Brazil. The invasions of private property, even
when deaths result, and the gradual taking over of all government
agencies by the PT, do not seem to draw attention overseas.

Richard Hayes


Picture Lula has returned from his third trip to Africa. This time he participated in a meeting of the Portuguese speaking countries in São Tomé e Príncipe. He also visited Gabon, hob knobbing with the dictator, Omar Bongo, and stopped at Sal in the Cabo Verde Islands.

As pointed out by columnist Diogo Mainard in this week's Veja magazine, no mention was made about the calamity in the Sudan. Brazil, now exercising a rotating seat on the UN Security Counsel, cast a dissenting vote against the resolution condemning the government of Sudan for allowing the atrocities taking place in Darfur.

Lula and Brazilian diplomats are attempting to round up support for its bid to become a permanent member of the UN Security Counsel.

Victory? We Will See

The World Trade Organization's agreement to continue talks about agricultural subsidies in the First World has been heralded as a victory for Brazil's aggressive policies. Whether any concrete results that would help the developing nations will evolve, remains to be seen.

This is a complex topic involving the way of life in many European countries and payments to industrial agricultural enterprises in the US. The future of the WTO as a relevant organ is as much at stake as the agricultural aspirations of the Third World.

Calm continues to reign in local financial markets, following the worldwide pattern. In spite of petroleum prices reaching record levels, the orange alert in the US and revelations of possible wrongdoings on the part of high officials of Banco do Brasil and the Central Bank, the future markets for interest and foreign exchange have not reacted significantly.

Good news about the economy picking up and continued surpluses in the primary budget and foreign trade figures have maintained the Brazil risk below 600 basis points with C-bonds quoted at over 94 percent of their face value.

Dirt in High Places

The week before last, Isto É, a news magazine, published a story stating that the Director of Monetary Policy at the Central Bank, Luiz Augusto Candiota, possessed funds abroad that had not been declared on his income tax return.

Henrique Meirelles, president of the Central Bank, was said to have made contradictory reports to the tax and the electoral authorities as to income earned while he resided in the US.

Initially it appeared as if this would all blow over as Congress was in recess. But Candiota resigned saying he did not want to blemish the reputation of the Central Bank.

This week, Veja, considered to be a more responsible magazine, amplified on the accusations against Meirelles and added some dirt about possible real estate holdings that had not been declared on his statement of assets.

My feeling is that Meirelles will not easily surrender to pressure. Meirelles is independently wealthy and makes no secret of his political aspirations.

Meirelles, a member of the opposition PSDB (Partido da Social Democracia Brasileira—Brazilian Social Democracy Party) or tucano (toucan) party was elected as a Federal Deputy from Goiás in 2002.

He gave up his mandate to accept Lula's invitation to preside the Central Bank, a job that several previously solicited candidates would not touch due to Lula's unorthodox behavior at the time.

Henrique Meirelles has done an excellent job in maintaining a strict monetary policy, the positive results of which are now beginning to appear.

He is at home in New York, London and Basel and his presence has given Lula's government the much-needed appearance of responsibility. It would be a blow to Lula's image in international financial circles should Meirelles be lost.

The resignation of Candiota has complicated the government's position, as it appears that he has admitted guilt. The case of Cássio Casseb, president of Banco do Brasil also indicated as having undeclared accounts abroad, is aggravated by the fact that Banco de Brasil gave away R$ 70,000 (US$ 23,000) worth of free tickets to a recent musical show in Brasília.

Profits from the show went to a fund to build a new national headquarters building for the Workers' Party, to which President Lula belongs. This is a flagrant violation of ethics using the bank's funds to help the ruling party.

The end of this case is not in sight. Both Casseb and Candiota are former employees of Citibank and Meirelles last position was president of the international operations of Bank Boston.

High Price of Money

Meirelles, because of his professional past, is frequently accused of favoring local banks and foreign creditors, to the detriment of industry and business. High interest rates are needed to control inflation, Meirelles believes.

It happens that both Banco Itaú and Bradesco, the nation's two biggest non-government owned banks, have posted record earnings for 2004's first semester.

This is in spite of an economy that is sputtering to show some life after last year's negative GNP growth. Recent revelations about possible wrongdoings may give Henrique's opponents more ammunition to shoot him down.

Aside from this possible occurrence, that is the changing of command of the Central Bank, there are no pending factors that would immediately alter the market's favorable view of Brazil at present.

The illegal invasions of private property, even when deaths result, and the gradual taking over of all government agencies by the PT, do not seem to draw attention internationally.

Football diplomacy should receive favorable press, as Brazil will send a lineup of top players to Port of Prince on August 18. The team, including several men from the lineup that defeated Argentina in Lima for the championship of the Cup of the Americas tourney, will train in the neighboring Dominican Republic.

Lula will be heading soon to the Dominican Republic where he will participate in the inauguration of their new President, Leonel Fernandez, on August 16.

As head of the UN peacekeeping mission in Haiti, Brazil is doing its best to restore law and order through dialog, winning hearts and minds, rather than using force.

Compared to many nations of the world, Brazil is privileged in spite of the many defects of its rulers.

Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. Since then, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at 192louvre@uol.com.br.
São Paulo, August 4, 2004.

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