Brazil’s Lula Finally Stops Playing the Blame Game

Brazilian President, Luiz Inácio Lula da Silva Brazil’s President Luiz Inácio Lula da Silva is not a happy man at the moment as the international financial crisis threatens the achievements he has overseen over the last six years. The prospect of his last two years in office ending on a low note has revived the old-style Lula who hates bosses and gringos and led to a few foolish outbursts.

Fortunately though, his reactions to the crisis to date have been more like those of a grumpy old man who just wants to have a good old moan than someone who is about to do something drastic and make a bad situation even worse.

Until now Lula has adopted a King Canute policy to the crisis, insisting that it would not spread over into Brazil. He used a variety of fairly strong arguments to justify his case: the fact that Brazil was now less reliant on trade with the United States and European countries, thanks to the rise of China; the Central Bank’s treasury chest of over US$ 200 billion in foreign reserves; the discovery of huge offshore oil and natural gas deposits; obtaining investment grade status from two of the world’s main ratings agencies; controlled inflation; rising formal employment; and a healthy (albeit declining) trade balance, amongst others.

He seemed almost gleeful at times as the situation in the US worsened. However, his mocking of George Bush and attempts to blame him – “The press keeps asking me about the American crisis. I say: ask Bush. It’s his crisis, not mine.” – have ended and he now knows that Brazil is on the front line and it is time to take action.

The crisis hit Brazil like a hurricane at the end of September when Brazilian exporters found they could no longer get essential loans as international banks and financiers cut off credit lines. The situation worsened as the dollar shot up in value against the real. The São Paulo stock market plunged almost on a daily basis, with trading being suspended twice on October 6 as the Ibovespa index crashed by 15% setting off circuit breakers. The stock market has lost 15% of its value in a month and 34% in a year at the time of writing.

The harsh effects of this sudden fall in the real were seen in two high-profile cases announced on the same day – the pulp and paper company, Aracruz, and the food giant, Sadia. Aracruz lost 1.9 billion reais (US$ 823 million) – yes, that’s billion, not million – and Sadia lost 750 million reais (US$ 325 million) when hedging operations went wrong due to the speed of the rise in the dollar.

Lula accused them of speculating against the real, but this was unfair as exporters all over the world use hedges to protect themselves against currency fluctuations. These two companies may well have overstepped the mark into speculation but they were not conspiring in any way against the real.

In both cases, the finance directors were fired and the chairman and deputy chairman of the Sadia Board of Directors stood down. Some Sadia shareholders are now threatening to sue them. When was the last time any member of Lula’s government was fired or stood down so quickly after making a mistake or being involved in a public scandal and how many of them face court proceedings?

The Folha de S. Paulo newspaper reported that Lula had given the Central Bank carte blanche to deal with the crisis. If so, this is probably the best policy as Brazil’s politicians have been virtually silent on what has been happening unlike their counterparts in the US who have been at the center of the debate on the US$ 700 billion aid package.

The Central Bank acted quickly and adopted a number of measures to date such as providing “loans” to exporters through sales of dollars and reducing the compulsory deposits the commercial banks have to keep with the Central Bank. Lula also signed a provisional decree on October 7 giving the Central Bank powers to buy up loan portfolios of troubled smaller banks and make loans in foreign currencies.

Despite this, we are unlikely to see the government stepping in and nationalizing banks as has happened in the US (home of the so-called free market) and Europe as Brazil’s banks are generally seen to be in a better shape than those in the so-called developed countries.

So far so good, but there are simply far too many other uncertainties involved for Brazilians to feel secure. For example, prices of commodities, on which Brazil is so dependent, have been falling. Even oil, which was trading above US$ 130 a barrel a short time ago, has fallen below the US$ 100 level at the time of writing.

This is bad news not only in the short term, as Brazil is a producer of oil, but also in the long term as Lula is pinning much of his hopes on exploiting the offshore reserves. Plans to set up a new state-run company to assume control of these reserves and decide how they are to be managed have been put on hold. Just where the massive funding will come from to finance this exploration – and at what cost – means it will be a long time before this idea can be considered again.

Despite all this gloom, there are still plenty of signs that the Brazilian economy is doing well. Indicators on inflation, employment, retail sales and industrial production released over the last few days are still buoyant. This shows how far Brazil has advanced since the Asian, Russian and Argentinean crises.

However, the sad news is that Brazil is still vulnerable and this crisis is just too big to avoid. The main effect (unless something drastic occurs in the next few months) will likely be seen in GDP growth next year.

While analysts are still fairly confident that GDP will grow by around 5% this year, they are cutting their expectations for next year to 3% to 3.5%.

Some are going even further. Morgan Stanley has just published a report with a chilling prediction of 2% growth in 2009 and no cuts in interest rates until the fourth quarter. That sounds a bit scary but perhaps the best thing for Lula to do would be to stop his wishful thinking and prepare for such an eventuality.

John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site www.brazilpoliticalcomment.com.br. He can be contacted at jf@celt.com.br.

© John Fitzpatrick 2008

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