Brazil: Too Tense for Comfort

Brazil: Too Tense for Comfort

Several moderate politicians and the press have criticized the
overly lenient attitude of
Brazilian President Lula toward violence,
vandalism, invasions and general lawlessness on the part
protesters of the various political movements. Things have
not gotten out of hand, but this
could change soon.



The Friday before last and over the weekend of August
2nd and 3rd, tension reigned in Brasília, in the financial
markets, in certain rural areas and in São Bernardo do Campo where 7,000 families were camped out on land owned by
Volkswagen. Due to worries over the destiny of the pension reform bill before the Lower House of Congress, Lula postponed a visit
to five African countries. He correctly felt that his presence in Brasília was more important.

Contributing to gloom and doom sentiment was the less than enthusiastic reception by financial markets of an
attempt by Banco Central to swap certain hard currency denominated bonds for those of longer tenor. The timing was bad as
higher yields on US bonds helped to steer investors away from more risky paper such as Brazil has to offer.

Also the seemingly deteriorating situation in Brazil did nothing to whet the appetite of bond holders to go for higher
yields on longer term bonds. The operation was not a complete failure as US$ 1.3 billion of the US$ 2 billion the authorities
had offered for exchange was taken up. But it could be a sign of more difficult times ahead as the country attempts to
borrow another US$ 25-$30 billion until the end of the year to keep current on maturing obligations.

Rumors that Finance Minister Palocci was on his way out did nothing to calm markets. It is no secret that his market
pleasing policies of sound monetary and fiscal measures are not that popular with many other cabinet members, principally
Lula’s right hand man José Dirceu. Demands to ease up and stimulate the economy are growing. Palocci and others have
emphatically denied that there are rifts, which of course merely confirms that they exist. His departure or dismissal would be an
ominous event.

To placate the auto industry that employs several thousand workers and has threatened huge layoffs, Palocci
announced a reduction of the IPI or Excise Tax on certain models. The car manufacturers in turn have agreed to lower prices of
their cars proportionately and not fire any workers through November when this temporary pact will, in principle, expire.

Market tension eased somewhat midweek as an altered version of the Pension Reform was passed by a comfortable
margin in the Chamber of Deputies. By caving into the judges, who are keeping nearly all of their perks, Lula’s government has
lessened the possibility of future judicial battles over the constitutionality of these measures.

Far from ideal, the changes are a major step in the right direction and will help to reduce the deficit of the INSS or
Social Security accounts that contribute significantly to Brazil’s mounting indebtedness. Also the bill diminishes some the
inequities that benefit government workers, responsible for 76 percent of the social security deficit, to the detriment of
retirees from the private sector. The numerical consequences of these changes will only be known after the Senate votes them twice.

This bill has passed the first round four months after its presentation to Congress. After amendments, on August 20,
the Lower House must again vote upon the measures before the bill goes to the Senate, where less resistance is expected.

Passage of the first round would not have been possible were it not for the votes of over 70 deputies from the
opposition PFL and PSDB, in a rare demonstration of civic responsibility. These parties, who until January
1st, 2003 were of the ruling coalition, have pledged to render support for measures that are in Brazil’s benefit, in contrast to the behavior of the PT
(Workers’ Party) when in opposition threw up obstacles to pension reform.

PT Rebels

Arm twisting by President Lula and his aides did not convince many members of his own PT and other parties of the
ruling coalition to support the government sponsored proposals. The PT so far has not handed out many jobs to those other
than their own members. That makes other parties feel left out and resentful.

This responsible stance of the PSDB and PFL may endure until the pension and tax reforms have been voted. But
with municipal elections coming up in 2004, it will not last long. The PT may feel that it needs support from the center and
center right if it is to accomplish anything legislatively. Burning of PT flags, the symbolic burial of Lula and the breaking of
over fifty windows in the Chamber of Deputies by angry government workers and other protesters over pension reforms
indicate that Lula is loosing support from some of those who elected him.

The recently formed CMS or Coordenação dos Movimentos Socias (Social Movements Coordination) is an attempt
to unite the various segments of society with grievances to express. The purpose of these groups, including students,
women, teachers, lawyers, judges, blacks, gays, small formers, the landless, and the homeless is to force Lula’s government to
give priority to the social agenda. They feel that by uniting several social movements, demonstrations, several of which are
planned, will be better orchestrated.

Their plans include a national campaign against unemployment, defense of the activities of the MST to accelerate
agrarian reform, intensification of occupation of buildings in major cities, impeding the independence of Banco Central, help
for small farmers, prohibition of the use of genetically modified seeds, anti globalization measures including opposition to
the proposed Free Trade Association of the America and measures of the World Trade Organization, a reform of the
federal university system including marches and debates and possibly a suspension of payments of the foreign debt.

CMS feels that these funds could be better spent on social programs. All of this sounds like the platform of the PT
before they toned down their rhetoric in order to gather votes for Lula from less radical elements. Unless the economy picks up
soon, noise from these and other quarters can be expected.

The government has talked about several measures that they plan to announce in order to stimulate the moribund
economy, create jobs and reduce pressure for land reform. The IPI reduction for autos is the first to actually happen. Friday Banco
Central reduced banks’ compulsory deposits on checking accounts from 60 percent to 45 percent. It is hoped that this reduction
in funds tied up bearing no interest may encourage banks to charge less for loans and make more of them. Copom
((Comitê de Política Monetária— Monetary Policy Committee) will probably further lower the SELIC or basic interest rate from
its current 24.5 percent when it meets later in August.

Lula’s various spokesmen have stated that public lands owned by the federal and state governments may be used to
settle families since there is little money available to expropriate land from rightful private owners. They talk about low cost
housing and public infrastructure works. It remains to be seen if any of this actually happens without increasing government
deficits and reviving inflation, the control of which is one of the major accomplishments of Lula’s government thus far.

Spirits lightened before the weekend as the illegal occupants of the land owned by Volkswagen peacefully left the
area when confronted by a police force of more than 500 men, some of them on horseback. The decisive action on the part of
São Paulo governor Geraldo Alckmin was responsible for accomplishing this as Lula and his people did nothing to remedy
this situation nor did they condemn it.

Several moderate politicians and the press have criticized the overly lenient attitude of Lula’s government toward
violence, vandalism, invasions and general lawlessness on the part of protesters of the various political movements. So far
things have not gotten too much out of hand. But if the conflicts escalate, which could happen, Lula must make some difficult
decisions and take action if he expects to help PT candidates win more mayoral contests next year and be reelected himself in
2006, should he finish his present term.

São Paulo, August 12, 2003


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

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