Lula Vows to Pay Brazil’s Debt

His three decades as a rabble-rouser now behind him, President-elect Luiz Inacio Lula da Silva took his first steps Monday as a statesman, telling Brazilians he would be a responsible steward of their nation’s troubled economy and that his government would honor Brazil’s foreign debt.

But the man most people here call Lula also promised that his Workers’ Party government would make a sharp break with the pro-business policies of outgoing President Fernando Henrique Cardoso and that he would fight poverty and unemployment.

“A majority of Brazilian society has chosen a new economic model,” Lula said in a nationally televised address the day after winning the presidency in a landslide. “I will not let the Brazilian people down.”

Lula’s triumph was part of a regionwide shift to the left that also has boosted the fortunes of radicals and mavericks in other South American countries, including Bolivia, Argentina and Uruguay.

At the same time, financial analysts and investors have long feared the consequences of a Lula presidency, believing that he could be forced to default on Brazil’s massive debt to pay for the social programs he has promised.

On Monday, Lula’s election did not produce the meltdown on the markets some had feared, although most of the country’s financial indicators were down. Brazil’s currency, the real, dropped 1.3%, backtracking after a weeklong rally. The Sao Paulo stock market, the Bovespa, dropped 3.6%.

The incoming government will face a host of economic difficulties after Lula takes the oath of office Jan. 1. Analysts predict Brazil’s public debt will reach $340 billion by the end of the year, nearly three-quarters of its gross domestic product. Unemployment stands at 8% after a yearlong economic slowdown.

For many Bush administration officials, whether Lula and his leftist Workers’ Party are up to the challenge of rescuing Latin America’s largest economy remains an open question.

“The markets are going to look very carefully at what he does today, tomorrow and the next week, to provide reassurance that he’s not a crazy person,” U.S. Treasury Secretary Paul H. O’Neill told business leaders at a meeting in South Carolina.

O’Neill added that he hoped that Lula would decide to keep many of Cardoso’s policies -- including an austerity package the government agreed to in August as part of a $30-billion bailout from the International Monetary Fund.

The country’s debt load is so onerous that unless Brazil’s currency and markets recover soon, there is a risk that Brazil could collapse even if Lula does what the IMF and world financial markets want him to do.

“The big worry is that default may be unavoidable, because the devaluation is raising the cost of servicing the debt so much,” said Gary Hufbauer, senior fellow at the Institute for International Economics in Washington. “The debt dynamics, added to Brazil’s disappointing economic growth, become fatal.”

Wall Street will be looking closely at whom Lula and the Workers’ Party appoint to key economic posts in his transition team over the next few days and weeks, said Lisa Schineller, Brazil debt specialist with Standard & Poor’s Corp.

Investors’ worries about Lula have caused Brazil’s bonds to dip as his lead in preelection polls grew larger. Standard & Poor’s has placed Brazil on its “negative outlook” list, meaning the rating firm is poised to downgrade the country’s bonds if Lula wavers.

Brazil will need to come up with about $45 billion next year to keep current on its public debt, a burden two or three times that of countries with similar credit ratings, Schineller said.

On Monday, Lula said several things that Wall Street wanted to hear. He asked his followers to be patient and to give him time to turn around the nation’s economy.

“The Brazilian people know that what was done and wasn’t done in the last decade can’t be fixed with a magic wand,” he said.

“As we said in our campaign, our government will honor the agreements reached by the [Cardoso] government,” he said. “The difficult position Brazil faces demands austerity in the use of public funds and an implacable battle against corruption.”

In his 20-minute speech, Lula also promised to create a “Ministry of Social Emergency” to fight hunger. He said he would adopt a more aggressive stance in trade negotiations with the United States. And, sounding a lot like the trade union activist and radical he once was, he paid tribute to the fallen “social fighters” who did not live to see the party’s moment of glory.

“We will be loyal to their legacy of human dignity, personal integrity, love for Brazil and passion for justice,” he said.

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Tobar reported from Rio de Janeiro and Kraul from Mexico City. Times staff writer Paula Gobbi in Rio de Janeiro contributed to this report.