O’Neill Voices Support for IMF Talks on Brazil

U.S. Treasury Secretary Paul O’Neill, whose comments on Brazil’s economic woes roiled Latin American markets last week, on Monday backed talks for an aid package to rescue Latin America’s largest economy.

For several weeks now, Brazil’s economy and the left’s political fortunes have been roller coasters traveling in opposite directions. When the left’s poll numbers go up, key financial indicators take a beating. And when the left’s poll numbers go down, the markets try to stage a recovery.

Brazil is the latest victim of a fiscal malaise that already has given Argentina the dubious honor of being the largest country to default on its debt. Along with Uruguay, which Sunday received an emergency $1.5-billion transfusion, the countries are suffering from low productivity, failing currencies, high unemployment, decreasing trade and beleaguered governments.

Amid those difficulties, O’Neill met with outgoing President Fernando H. Cardoso and said he was very supportive of the discussions between Brazil and the International Monetary Fund. Brazil, which has a net public debt load of some $250 billion, is seeking about $10 billion to help stabilize its falling currency.

“I understand the IMF has said they feel very good about their progress in the talks, and I think things are going forward,” said O’Neill, who will meet with business leaders today.

Before his trip, O’Neill had suggested that aid and loan guarantees would end up in the pockets of Latin American leaders. He later recanted, but that didn’t stop protesters who burned the U.S. flag Monday.

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Special Problem

Because of its size, Brazil is a special problem. The crisis here is being driven by the political fallout from this fall’s elections, in which the left is expected to do well.

New polls show the ruling-party candidate, Jose Serra, in third place far behind two candidates who propose a sharp break with Cardoso’s pro-business policies. Luiz Inacio Lula da Silva of the leftist Workers’ Party and Ciro Gomes of the center-left Popular Socialist Party appear to be headed to a presidential runoff in October.

Both have said Brazil should rethink its relationship to the U.S. and the international economy. And both have promised to focus special attention on the 1.8 million workers who are unemployed in Sao Paulo, South America’s largest city.

But just the idea of a Lula or Gomes presidency terrifies the other Brazil, the executives who run the sputtering dynamo that is the Brazilian economy. From the high-rises of Sao Paulo’s financial center, those same business leaders look out to the industrial suburbs that are a leftist stronghold and see a dangerous force gathering like storm clouds in the nation’s business climate.

“The Brazilian economy is very vulnerable to fear of risk because so much of our economy is tied to exports and the world economy,” said Antonio Machado, an analyst with Opportunity, an investment firm.

A poll released Monday showed Lula leading with 35%, Gomes second with 26% and Serra at third with 13%. Each poll that shows Lula leading helps send Brazil’s “country risk” factor soaring; the figure is a measure of the riskiness of investing in Brazil. And with Serra’s numbers reaching new lows, so has the value of the Brazilian currency, the real. On Monday, the real closed at 3.17 to the dollar, having lost 20% of its value since June.

Lula and his coterie of advisors have suggested that the market shifts are part of a government-backed effort to sabotage his campaign. They also argue that the man who 22 years ago helped found the Workers’ Party, known by its Portuguese initials, PT, is today a social reformer with good business sense who has mellowed as he has grown older.

“It seems absurd to me that ... people are trying to sell this kind of economic terrorism, on the basis of what some polls say,” Lula said recently. “We want to offer to the foreign investor something more serious than what they have seen up to now.”

No longer does Lula speak of nationalizing key industries or reneging on Brazil’s foreign debt. No longer do his speeches draw heavily on fiery rhetoric of class struggle. Instead, he tosses around phrases such as “economic growth” and “lower interest rates,” saying Brazil should aspire to return to the boom years of the 1960s and ‘70s.

“Lula has matured,” said Andre Singer, a Sao Paulo journalist and Lula’s spokesman. “As you get older, you are more capable of understanding the reality of a society and governing.”

Gomes, on the other hand, seems to have grown more feisty with age. This campaign season, the 44-year-old former finance minister and provincial governor has railed against what he calls Brazil’s “oligarchy.” He has called for a dramatic increase in the minimum wage and has said he might oppose further agreements with the International Monetary Fund.

“If I were to agree to an [IMF] accord, I’d be going against the immense desire for change that I see in this country,” Gomes said Friday.

The same polls that put Lula ahead in the Oct. 6 vote show most Brazilians increasingly frustrated with spiraling rates of crime and unemployment, and disgusted with rampant government corruption.

“People want a change,” said David Fleischer, a professor at the University of Brasilia and director of Brazil Focus, a political newsletter. “They see Lula and the PT as a viable alternative.”

In a country where electioneering is increasingly a media-driven activity, Serra suffers from an image problem, his dour looks and surly demeanor turning off many voters.

Lula, meanwhile, has gotten a make-over, straightening his teeth and often wearing suits and ties to campaign events instead of his trademark T-shirts and baseball caps.

Serra has been hurt, too, by the tinge of scandal surrounding the government of Cardoso, who has served two terms and cannot run for reelection because of term limits.

Last month, Justice Minister Miguel Reale resigned after Cardoso declined to launch a federal investigation into allegations that organized crime has infiltrated the government of Espirito Santo state, just north of Rio de Janeiro. “Cardoso may have boosted Lula into the presidency with what he did in Espirito Santo,” Fleischer said.

For all his difficulties, Serra retains rock-solid support in at least one important constituency: the financial markets.

He has pledged to keep in place the current government’s economic recipe of fiscal austerity, budgetary surpluses and low rates of inflation.

“Serra is someone the markets are comfortable with,” Machado said. “He represents continuity.”

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Business Concerns

Business leaders are worried that the mellower Lula of the campaign would be unable to resist the demands of his radical supporters if he becomes president.

To address such concerns, the PT took its most dramatic step of the campaign in February. Lula announced that a conservative businessman, Jose Alencar of the Liberal Party, would be his running mate.

Months later, when Alencar was confirmed as the PT’s vice presidential candidate at a party congress, several militants responded with boos.

“Lula is the best candidate to build a more just Brazil where the working class has employment and dignified salaries, education and food to eat,” said Joao Felicio, president of the CUT, a labor federation of more than 3,000 unions. “I believe in Lula’s life story, and I certainly don’t trust Jose Serra and this current economic model.”

The PT’s antidote for Brazil’s woes follows orthodox liberal thinking: Put more money in the hands of Brazil’s working people--through anti-poverty programs, subsidies that lower food prices and the like--and that will in turn stimulate economic growth.

Like Lula, Gomes has chosen a candidate with conservative credentials as a running mate. But Gomes is viewed even more skeptically by many in Brazil’s financial community, who see him as unpredictable and a loose cannon.

“Bankers are unanimously very worried by Ciro,” an executive at one of Brazil’s banking associations told the Dow Jones news service recently.