Lula's government suffered its first major legislative set back earlier this
month. The Senate failed to approve a Medida Provisória (Temporary
Measure), a type of decree law, banishing bingo, slot machines and electronic
Lula had promulgated these
measures during February in the wake of the accusations of bribe taking against
his senior advisor, Chief of Staff, José Dirceu. Instead of allowing
a congressional investigation to take place, Lula and his people decided to
do away with this form of entertainment since the persons extorted by Waldomiro
Diniz were involved in these then permitted, but always shady activities.
It did not take long for
the bingo parlors, which employ 200,000 people around the country according
to reports at the time they were closed down, to reopen. What is attracting
attention at the moment is not whether or not this form of gambling, commonly
used for money laundering, is good or bad for the country, but that Lula seems
to have lost control of the Senate.
The coalition of several
parties that have backed Lula's legislative measures in the past is disintegrating
since the relationship between the executive branch and Congress has been
taken over by Aldo Rebelo. In the past, this chore was performed by José
Dirceu with his aide, the now disgraced Waldomiro Diniz, directly in charge.
Government reaction to
Sunday's New York Times story by Larry Rohter has been quick and aggressive.
Perhaps the article exaggerated in stating that Lula's drinking is a "national
concern." Everyone knows that Lula drinks but it is not a big deal.
The mentioned list of
his most-publicized gaffes was old hat and may be attributed to Lula's lack
of knowledge and polish rather than to intoxication. Also Brizola, a has-been
firebrand political hack and the brother-in-law of the now deceased former
president Jango Goulart, who was ushered out of office to exile in Uruguay
in 1964 by the military, is not the trustworthiest source of information.
This revelation by the
New York Times, whether or not Lula's drinking contributes to the general
lack of direction his government exudes, comes at a bad time for Brazil. The
aura of confidence in Brazil, evident in financial markets up until recently,
has begun to dissipate.
The real has weakened
to its lowest level against the US dollar since April 2003. The so called
Brazil risk is up and Brazilian C-Bonds, the most heavily traded of Brazil's
foreign obligations, has sunk to levels not seen since soon after Lula took
For the first time since
I suggested selling C-bonds short at US$ 0.91 back in August of last year,
followers would be in the money. At Monday's quote of US$ 0.85, carrying costs
would have been covered leaving a nice profit. I doubt if we will see these
bonds reach a premium over par again in the foreseeable future.
Two positive international
events have been played up locally as major accomplishments for Lula and his
government. The WTO ruled in Brazil's favor on the issue of US subsidies to
its cotton farmers. It will be some time before any concrete benefits will
accrue to Brazil's cotton growers and those of many impoverished African nations
whose main cash crop is cotton. The US is expected to use all the delaying
tactics it can muster especially in an election year.
Given the current philosophy
against multinational organizations that prevails on the Potomac, the US might
even pull out of the World Trade Organization if it feels its selfish interests
are being threatened.
This decision in Geneva
can be considered a victory for the developing nations as it may eventually
influence how agricultural subsidies by the first world powers are treated.
The Brazilian initiative originated before Lula took office, something which
his PR people avoid mentioning.
The other encouraging
piece of news is that the IMF is willing to study the possibility of not counting
investments by government owned companies as expenses when calculating the
primary surplus or deficit. This future possibility prompted a rash of announced
capital investments by various ministries in Brasília.
No More IMF?
However the consequent
euphoria was short lived as the studies are just being initiated with no date
in sight as to their conclusion and how exactly calculations will be effected.
Since the authorities
have perhaps prematurely stated that after the current IMF agreement expires
at the end of 2004 they will no longer need help from this organization, the
alteration of the treatment of capital investments could wind up being a moot
I seriously doubt, however,
that Brazil will be able to attract the new money necessary to continue honoring
its foreign obligations without the IMF in the picture.
The current turbulence
in financial markets will hopefully be temporary and not a sign of an ensuing
crisis. The government has enough problems to face without this.
Lula continues to give
unwavering support to the policies of Finance Minister, Antonio Palocci, and
consequently to Henrique Meirelles, central bank president, in spite of calls
for their removal from members of his ruling coalition.
The trade figures continue
to be favorable mainly due to exports of the agricultural sector, minerals
and pulp. The portion of government debt denominated in dollars is less than
it was. But debt as a percentage of GNP is still higher than it should be
to provide comfort for creditors who notice.
Higher interest rates
in the US as well as expensive crude oil may make Brazilian debt obligations
more difficult to place. Right now the market is closed.
Banks' profits continue
to increase as they earn high spreads on their loans to individuals and businesses
but continue to carry government obligations as the major portion of their
Since the government must
rely on banks to buy its debt obligations, it cannot force the banks to lend
to the private sector at rates that might encourage investment and job creation.
Strikes of government
workers are intensifying causing hardship for many people particularly those
seeking to be attended by INSS, the social security agency. Federal tax inspectors
with their arms crossed are holding up exports.
Illegal invasions of productive
rural private property and government buildings continue with no evident action
being taken by Lula and his crowd to halt these actions.
None of this is new and
these occurrences should not be blamed exclusively upon Lula and the PT government.
Lula was courageous, after much delay, in raising the minimum wage by less
than 10 percent to R$ 260 per month.
Since many pension benefits
and salaries of state and municipal workers are based on this benchmark, a
larger increase, such as that being contemplated by Congress, would have disastrous
effects on the efforts to reduce government deficits.
Congress is not expected
to produce much of a useful nature in the near-term future. Time is spent
in speech giving in response to the New York Times article, which may
have actually served to bring opposition forces to support Lula at least for
a day. Initially, Congress was united in defending national dignity and sovereignty
against foreign meddling in Brazil's internal matters.
Aside from the matter
of the minimum wage that certain elements wish to increase over and above
the R$ 260 decreed by Lula, Congress is divided over a possible constitutional
amendment that would allow the reelection of the presidents of the Chamber
of Deputies and Senate.
This controversy may result
in splitting the PMDB, the largest party that nominally supports Lula. If
so, Lula's base of legislative support will be further weakened.
At least for the time
being, the bingo parlors are open in spite of the government's search for
means to have them closed again. And so it goes in Lulaland.
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 firstname.lastname@example.org.