Brazil Works to Thwart Collapse

Amid growing concern that a massive bailout by the International Monetary Fund may not be enough to stave off financial panic and collapse in Brazil, President Fernando Henrique Cardoso held emergency talks Monday aimed at winning concessions from the two leftist politicians who lead the race to succeed him.

The candidates, Luiz Inacio Lula da Silva of the Workers’ Party and Ciro Gomes of the Labor Front, both made conciliatory statements after the meetings. But both stopped short of offering full support for the belt-tightening program the IMF has attached to its $30-billion loan package.

They have criticized IMF officials for imposing loan conditions, including reductions in government spending and currency controls, that they say hurt Brazilian workers and the poor.

Political uncertainty and mounting debt have combined for weeks to unhinge the Brazilian economy, Latin America’s largest. The country has been edging closer to the sort of financial meltdown experienced last year by its neighbor Argentina, raising fears of a “contagion effect” throughout the region.

Argentina defaulted on its debt earlier this year after protests drove President Fernando de la Rua from office. Earlier this month, the Bush administration agreed to a $1.5-billion emergency loan for Uruguay in the wake of a financial crisis that sparked rioting in the capital.

Other South American countries including Peru, Bolivia, Colombia, Venezuela and Ecuador are suffering political or economic woes. Ecuadorean Finance Minister Francisco Arosemena announced Monday that his government had reached preliminary agreement with the IMF on fiscal targets, a key step before receiving its own emergency loan.

In Brazil, both the value of the currency and the government’s bond rating have dipped since the IMF agreed Aug. 7 to grant Brazil the largest bailout in the fund’s history.

“We are conscious of the gravity of the situation, and are ready to speak with all sectors of society in order to prevent the crisis from bringing more suffering to the Brazilian people,” Lula said in a written statement after completing his meeting with Cardoso in Brasilia, the nation’s capital.

Lula’s comments helped bring a measure of calm to Brazil’s turbulent markets. The national currency, the real, gained about 2% in value and closed at 3.10 to the dollar.

Lula holds a strong lead in nearly every poll ahead of the Oct. 7 election. If no candidate wins a majority, the top two candidates will move to a runoff three weeks later. The ruling-party candidate, Jose Serra, is the preferred candidate of the investment community, but has been running a poor third.

In reaching their agreement with the Brazilian government, IMF officials asked that the leading presidential contenders in the race sign off on the conditions attached to the loan.

But the opposition candidates--Lula, Gomes and Anthony Garotinho, who is running fourth in polls--are reluctant to do so, mindful of an electorate that appears to be increasingly disenchanted with Cardoso’s pro-market reforms.

In addition to criticizing the conditions on the IMF loans, Lula and Gomes have said Brazil needs to increase spending for health and education, and pull back from free-trade negotiations with the U.S.

Lula also said after meeting with Cardoso that if elected president he would break with the current government’s policies “from the first day I am in office.”

While reminding his audience that his party had agreed to abide by all of Brazil’s international commitments--including those with the IMF--Lula also said he would remain true to his principles and would not adopt policies that hurt Brazilian workers.

Lula is a lifelong trade unionist who cut his political teeth as a labor organizer in the factories of Sao Paulo.

Gomes emerged from his own meeting with Cardoso to say he had asked the president for a draft of the IMF agreement and that as soon as he received one he would render his opinion.

Taking a jab at the government, he said Cardoso’s “economic model” was to blame for the crisis, as are “international [investors] unwilling to understand the potential of the Brazilian economy.” Garotinho took an even tougher stance, saying Cardoso was trying to “impose the straitjacket of a monetary policy monitored by the IMF.”

Despite such criticism, Cardoso was ready to declare victory Monday evening.

“The only one who has to give explicit support to the [IMF] agreement is me,” the president said. “The question is whether the candidates will honor it if elected. All of them told me they will.”

A growing number of economists and observers--including financier George Soros--have also criticized the IMF package, saying it dooms the incoming government, whoever leads it.

“The agreement is a life vest for President Cardoso but an anchor around the neck for the next president,” said former Economy Minister Delfim Netto.

Among other things, the agreement makes the aid conditional on Brazil maintaining a budget surplus of 3.75% before taking into account the interest it pays on its debt. But running such a surplus will mean the government will probably have to sharply reduce spending or raise taxes--either of which could bring recession.

“The fact that this package failed to bring relief [to Brazil] indicates that something is fundamentally wrong with the international financial system,” Soros wrote recently.

Similar concerns have been expressed by some of the business leaders who form the core of support for Cardoso and Serra.

Mario Bernardini, vice president of Sao Paulo’s Industrialists Federation, expressed skepticism that the IMF deal can pull Brazil out of its deepening budgetary hole.

Brazil’s public debt stands at about $250 billion. That number grows as the value of the real drops and as market jitters drive up interest rates.

“We have only bought time,” Bernardini said. “Maybe six to eight months.”

Last week, Moody’s Investors Service, the rating agency, downgraded the country’s foreign-currency bonds five levels below investment grade.

“No matter which candidate wins this fall’s presidential election, the new administration will face growing fiscal pressures,” Moody’s said.

Lula leads in every poll here, pulling as far as 24 percentage points ahead of the ruling party’s Serra. And his campaign shows few signs of losing momentum.

The Sao Paulo Industrialists Federation has quietly announced it will back Lula in the runoff election if, as expected, Serra is eliminated in the first round of voting.

“Lula has the profile of a negotiator, he grew up where negotiating was the way you solved problems,” Bernardini said. “We need a national consensus, and Lula has more possibility of making that happen.”

By contrast, Serra’s grim demeanor and failure to make headway in the polls has led to a near rebellion in the ruling coalition. Members of the government- allied Brazilian Democratic Movement Party reportedly gave him an ultimatum recently: If his standing in the polls doesn’t improve by Sept. 1, they will abandon him.

Failure by Serra to revive his campaign would probably give Brazilians the choice of two left-leaning candidates in the runoff: Lula, who is known for his fiery speeches attacking the nation’s oligarchy and the vagaries of the capitalist system; and Gomes, who despite having once been Brazil’s economy minister has cultivated a reputation as an unpredictable and mercurial leader.

Gomes only enhanced that image with his remarks at a dinner with financial leaders last week. Asked what he might do to calm Brazil’s roiled markets, Gomes exploded. “I would cut off my own hand to avoid signing Brazil away to the bankers!” he shouted.

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Times staff writer Tobar reported from Buenos Aires and special correspondent Gobbi from Rio de Janeiro.