The week in Latin America was pretty busy due to the repercussions on President Lula’s comment during a visit by the French President, Nicolas Sarkozy. Besides being the honor guest and besides the fact that it is the year of France in Brazil, Sarkozy came with two missions: the first one was simple and the second was relatively difficult. The simple mission was to carry out something that was already or partially agreed upon: the purchase of submarines and helicopters. The difficult mission would be to turn things around regarding the fighters Brazil intends to buy.

 

 

Still missing a technical report, Rafale (French fighter aircrafts) was not FAB’s (Brazilian Air Force) favorite. The engineers apparently prefer the Swedish plane Gripen NG, while pilots show a preference for the Super Hornet F-18, from the USA. Informally, Lula made Sarkozy’s job easier when argued that Rafale fighters could be chosen because this agreement would also include “transferring technology”. In the FX-2 program, technology transfer is a qualifying condition since the beginning of the bidding process. Each of the three current competitors presented solid technology transfer proposals.

 

 

Regardless of the merit of finding the best or worst choice for Brazil, Lula created a serious problem. Competition has become a relatively simple target for lawyers who would like to legally paralyze FX-2. The deal is only expected to be closed in October, but Lula ignored FAB’s opinion and created a diplomatic situation with the USA and Sweden. In Latin America, repercussion was immediate. The Colombian press, for instance, wants to find out whether there will be a dispute for influence among the USA, France and Russia in South America. According to Colombians, the rationale will take place through the full support of the USA concerning the Colombian cause against FARC (the Revolutionary Armed Force of Colombia), the relationship between Chávez and Russia and now the possibility Brazil has to buy everything at once.

 

Sovereignty, a word repeated time and again by the Brazilian Government, is in a dubious situation: depending on only one country for strategic weapons, as well as their parts and know-how. This same sovereignty was the theme on each Argentinean trendsetters decided to argue about. Will Brazil really take a dominant global position, or does the country want to speed up this process by getting stuck to a aligned country? For Argentineans, the purchase of Brazilian weapons is extremely important. In some occasions, they make it clear that, as far as the fighters are concerned, Argentina could follow Brazil’s choice. However, considering Rafale’s astronomic value, which even reduced will continue high if compared to the other two competitors, Argentina will not afford a complete squad. As part of the seduction package offered by Sarkozy, Brazil will be the exclusive vendor of Rafales in Latin America. Nevertheless, which neighbor country can pay for such plane?

 

In Mexico, they set a tone of irony. Formally the purchase of Brazilian weapons was little discussed, but according to talks with Mexican government sources, they believe Brazil is about to close a complicated deal with France in case it really buys the Rafale fighters. It is even considered that this plane could not be sold outside France. There were 14 lost biding processes and a great deal of confusion. There is no doubt that this is an excellent fighter, but which runs the risk of having Brazil and Libya as its sole purchasers.

The effects of the international credit crisis has provoked an exodus of US$ 4.397 billion in Brazil from the 1st of October to the 24th. This number is the difference between the amount of dollars entering the nation and the amount leaving; just last week, there was an exit of US$ 646 million.

 

The data is part of the monetary flux that monitors the movement of dollars both entering and exiting Brazil and was divulged this Wednesday by the Central Bank. For the entire year of 2008, the monetary flux registers a positive gain of US$ 12.791 billion. The result of US$ 45 billion entering and US$ 32.214 exiting the nation.

The House of Representatives approved last night the MP 442/08, which gives the Central Bank the power to accept the credit portfolios of banks facing difficulties with liquidity as guarantees of loans. The BC is also authorized to lend directly from the nation’s international reserves (around 200 billion dollars) to banks that finance exporting companies. The measure is now being analyzed by the Senate.

 

The text was approved with changes. The reporter, Representative Rodrigo Rocha Loures (PMDB-PR), highlighted four of the seventy-four amendments presented. One of the changes is that the BC has to send every trimester a report to the Congress including: the total value for the trimester and the value accumulated for the year of the loans; the financial conditions of the applied measures (discount and spread, for example); the accumulated value – annually and Quarterly – of credit (paid on time or late); and an explanation of the impact these operations described in the BC’s results.

 

This information will be debated at the Biannual meeting that occurs between lawmakers and the president of the BC, as outlined by the Fiscal Responsibility Law (Complementary Law 101/00).

 

The national monetary aid comes in the following form: a bank having difficulty capturing money on the market, but has a low risk credit portfolios, can “sell it” to the BC with the agreement to repurchase it, as a loaning operation known as rediscount. The credit portfolios are composed of values that the bank have the right to receive, in the form of legal and individual debts.

 

From the value of this credit, the provision (value to cover the debt should the credit not be honored) will be deducted. What remains will have a discount (percentage variable according to the credit’s evaluation) applied to it.

 

Additionally, the BC will be able to accept a physical guarantee (property, for example) or financial one given by the controlling stock holder of a united company or other bank.

 

The text approved by the House of Representatives also stipulates that there are transparent rules and not discrimination for the acceptance of actions in a rediscount operation.

 

In November, the House of Representatives should vote a second MP against the crisis: 443/08, which authorizes the BC and Caixa to purchase banks having difficulties.

Brazil was slow in reacting to the worsening of the North American crisis. Not with regards to decisions, but in gestures and declarations, in other words “vocal administration”. Brazil, as the rest of the world, expected things to improve following the approval of the North American rescue package. However, what followed was a panic reaction and the Brazilian currency was attacked. Curiously, while the dollar skyrocketed, between September 1 and October 6, Brazil accumulated an ingress of dollars with a net positive balance of over 3 billion.

 

Only after the two meltdowns of the Stock exchange on Monday, Mantega and Meirelles appeared together to come the markets down. The episode opened up a margin for various interpretations. Henrique Meirelles, as president of the Central Bank, has a delimited margin of public action. He cannot speak about expenditure cutbacks or anticipate monetary or exchange-rate policy decisions.

 

When he was president of the American Chamber of Commerce in São Paulo, Meirelles heard Pedro Malan, who at the time was FHC’s minister, state that one doesn’t ask a political person about exchange policy. His attitudes are motive for action and not for public discussion.

 

With Meirelles taking care of the “back-office”, it is up to Guido Mantega take action to calm the market down in relation to economic issues: revenue collection, expenditure, growth, etc. Mantega did not act, as the Castilians say, with “protagonism”.  For some, he lacks the necessary charisma to be a Minister in times of crisis. Lula’s candidate Dilma Rousseff also disappeared.  She had nothing to say.  She probably felt it better not to commit herself to anything. Focusing her attention on the consolidation of her candidacy, she acted aloof up to the weekend, when she said what she really didn’t have to say about help for companies that suffered losses due to the skyrocketing dollar. “The government has no intention of socializing any losses and has not been approached by any company in this sense”, she stated.

 

The spokesperson role was left to Lula. Firstly, he stated that the crisis would not cross the Atlantic. Then, that it was global. Further ahead, that we may have to make cutbacks. Without a qualified spokesperson to address the market and society, now and then, the President transforms himself into a “Minister of Finance”.

 

It’s clear that the government lacks a figure like Antonio Palocci, who transmits security to the market, companies and economic agents.  In fair weather sailing, it’s easy to be the Minister of Finance of a country that is raking it in, has abundant reserves, a healthy financial system, plenty of credit from BNDES (and other public and private institutions), food and energy self-sufficiency and a president with enormous popularity and support from labor union and business leaderships, amongst other advantages. Most importantly, in a world that was doing very well.

 

With the crisis, besides the technical competence of the team, there is a psychological component that moves market decisions. Thus, the currency was attacked at a moment in which reserves were extremely high, the foreign exchange balance positive and also the capability of raising some US$ 50 billion from the IMF. When the situation gets complicated, the minister’s “protagonism” becomes fundamental. Not only as far as decisions are concerned, but most importantly, as far as attitudes and dialogue with society and the market are concerned.

PT party growth in the number of city halls achieved was undeniable: 157 more than in the 2004 elections. However, several considerations must be taken into account with regards to this performance. Firstly, whatever party is in power tends to achieve a larger number of city halls. This happened with the PMDB during the 80s and the PSDB during the 90s.

 

Secondly, the PT party’s performance was below their own expectations, being that they expected to elect approximately 700 mayors. Most importantly, a fact that must be taken into account is that Lula’s record popularity was not converted into votes. This might be a sign that the party is reaching its electoral limit.

 

In 2004, when President Lula and his administration had a much more modest assessment than the current one, the PT party achieved 16.15 million votes for mayor; now this number is 16.10 million. This number, combined with the difficulty that Lula had to transfer votes to Marta Suplicy (São Paulo), Luiz Marinho (São Bernardo do Campo) and Fátima Bezerra (Natal) should serve as a warning for the party and for the President of the Republic.

The election results in two Capital Cities confirm the classic political rule: popularity is not something that is easily transferable.  In São Paulo, Lula was unable to manage additional votes for Marta Suplicy, who did not perform as well as expected. In Belo Horizonte, all of Aécio Neves’ and Fernando Pimentel’s prestige was insufficient to elect Márcio Lacerda.

 

One must also take into consideration that municipal dynamics are different from the national debate. However, the ballot boxes have sent a clear message to the PT leadership and, especially, to Minister Dilma Rousseff: the president’s support might not be sufficient to guarantee an easy election. More will be required.

 

Although voters didn’t follow Lula’s orientation, they did however demonstrate a strong impetus for continuity. The quantity of reelected Mayors suggests that Brazilians are less susceptible to gamble, favoring the maintenance of current public policies and awarding good administrators. This might be the natural path for Lula and his nominee for the 2010 elections.

 

Within the universe of political parties, it can be said that the PT and the PMDB surfaced as the main winners.  Members of the PT achieve the greatest number of Capital Cities and increased the quantity of municipalities under their administration.  Besides traditional areas, such as the São Paulo ABCD, the PT consolidated its presence in the North, Northeast and Midwest, affording continuity to the party’s interiorization process initiated by Lula.

 

The PMDB maintained its municipal hegemony. It has good chances in Porto Alegre, Salva­dor and Rio de Janeiro, and is part of the Kassab ticket in São Paulo. Orestes Quércia, who is the articulator of the alliance, gained space in the dispute for the party’s leadership against Michel Temer, who was in favor of a coalition with Marta Suplicy.

 

The big loser was the DEM. It has practically left the “G4”, becoming a medium sized party. It launched its own candidates in only 300 municipalities, lost in Rio de Janeiro and did not make the runoffs in Salvador, it’s symbolic stronghold. It may gain a little breathing room with a Kassab victory in São Paulo.

In 1994, President Lula lost the elections in first-round voting because, amongst other reasons, he vehemently attacked the Real Plan. During that year, Lula stated that the plan was electoral and was only put together in order to elect Fernando Henrique Cardoso and therefore would be short lived.

 

Similarly as it was unpopular to badmouth the Real Plan in 1994, opposition candidates are realizing that attacking President Lula is not good business. The PSDB, adversary of Antônio Carlos Magalhães Neto (DEM) who currently leads the dispute in Salvador, is using declarations from the time of the “monthly payoff” scandal when he stated that he would give the president a “thrashing” in order to destroy his favoritism.

 

Aware of the damage that this could cause his campaign, ACM Neto even threatened to implode the alliance amongst the parties for the 2010 presidential race. Eduardo Paes (PMDB), who leads the dispute in Rio de Janeiro, also attempted to justify attacks made against President Lula in 2005, when he was a member of the PSDB.

 

It’s hardly surprising that for a long time now Aécio Neves has been stating that he doesn’t want to be an anti-Lula candidate, quite to the contrary, he wants to be post-Lula.  This will be one of the greatest challenges to be faced by the president’s adversaries: besides not being able to attack him, they will have to conjure up a message capable of seducing the electorate.

Considering the atmosphere of the Brazilian Petroleum Institute (IBP) meeting in Rio de Janeiro, last week, there is as yet much to be discussed. The industry is united around Petrobras and, there is also a movement for minority shareholders to take judicial action to avoid having the company negatively affected.  Another vector of confusion is the possibility that exploitation contracts might be annulled, which would affect the country’s image and Investment Grade.  Curiously, Petrobras, that always maintained an arrogant posture in relation to other industry companies, now seeks support amongst the private sector, which it needs to face the threat of the new state-owned company.

An exclusive article in this weekend’s Veja magazine includes a dialogue proving that government spies (Abin) recorded conversations of the Chief Justice of the Supreme Federal Court, Gilmar Mendes. Federal and Congressional authorities were also spied upon. Mendes and President Lula will meet this Monday to discuss the issue, which is annoying the Republic.

 

According to the Abin agent that passed on information to the magazine, under the condition that his name would not be released, illegal bugs placed on Mendes, are far from being an isolated action, and is almost becoming routine in Brasília. The targets, name by which spied victims are known in investigator slang, usually occupy important positions.

 

The accusation is serious and might rock the boat in Brasília. In the House, the Illegal Phone Tap CPI (Parliamentary Inquiry Committee) is underway.  The magazine stated that José Dirceu told Lula that he was being targeted by the illegal operations and accused Tarso Genro (Justice).  The opposition may submit a requirement summoning Dirceu and Genro to render depositions.

 

Whatever the case, it is as yet early to talk about an institutional crisis. It will depend on how President Lula and the government’s political coordination will conduct the issue.

This is the answer given by vice-President José Alencar to the Veja magazine regarding the possibility of the third mandate: “The Constitution doesn’t allow it.  But the truth is – I have already said this and will repeat it – is that, if someone were to ask what the people would like, they would hear that they want President Lula to continue in power.  For obvious reasons: good economic performances, sensible social programs, care afforded the less favored layers of society. However, for President Lula, this is out of the question. He doesn’t accept it in any way whatsoever”.

 
Welcome! Latin America is becoming consistently more important for the world. As the region becomes more stable, the world sees Latin America as a potential business area. In order to understand te potential Latin America has to offer, the world must understand the unique dynamics that the local politics function. This blog already exists in Portuguese since 2005 and is widely read. I believe it can be an important instrument to understand this amazing region. Suggestions, criticisms and opinions are welcome. + learn more

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