He might as well have been, though. Because unlike in January, when Franco caused a scary devaluation of Brazil’s currency by stopping payment on his state’s massive debt, the financial folks just weren’t paying attention. Perhaps they were too busy buying Brazilian stocks; the Bovespa index has soared 65 percent since the dark days of January. Or enjoying the resilience of the real, which has risen 22 percent against the dollar since bottoming out in the January devaluation. Or trying to get their hands on some Brazilian bonds: the same day Franco was blasting Cardoso, government economists reported reaping $2 billion from a worldwide offer of five-year bonds. The next day buyers snapped up an additional $1 billion worth–a remarkable vote of confidence in an economy that just three months ago threatened to become the latest, biggest victim of the global financial contagion, and to take the rest of Latin America down with it. “We all expected a turnaround, but what was surprising was the speed of the recovery and how fast Brazil returned to the capital markets,” says Paulo Leme, a senior economist with Goldman, Sachs, in New York.
What went right? Nothing Franco did. Aside from local suppliers, none of Minas’s creditors has seen a centavo of the nearly 17.6 billion reals ($10.5 billion) they are owed. The Minas moratorium continues. But Brasilia’s accountants have deftly plugged the holes in the federal budget by withholding entitlement payments to Minas and to other states in arrears. Further boosting confidence is Arminio Fraga, the new, 41-year-old, market-savvy central banker. Having taken over in the middle of a storm in February–the botched devaluation the month before cost $8 billion in reserves and felled the two previous central-bank directors–Fraga skillfully stabilized the free-floating real and went on to engineer Brazil’s successful bond sale. Perhaps most important, the rest of the world has calmed down considerably since Russia’s August default prompted a near seizing-up of global financial markets. In recent weeks both hedge-fund operator George Soros–Fraga’s former employer–and International Monetary Fund chief Michel Camdessus have said they thought the world financial crisis had ended.
No one is claiming that Brazil’s problems have disappeared. “This is a truce, not a victory,” says Mailson da Nobrega, a former Finance minister. The government still has plenty of work to do to rein in the budget and reform the profligacy-promoting Constitution. Unemployment remains painfully high. But for now at least the relief is palpable. Foreign investors are coming back–not just for the high interest rates, but to build factories. In January Brasilia was hoping to capture $12 billion in foreign direct investment this year. Now the target is $17 billion. “We have rewritten all of our estimates,” says Goldman, Sachs’s Leme. With dollar-priced imports soaring, pessimists predicted 25 percent inflation this year. Now few expect price increases to top 10 percent. As recently as March, Brasilia had to push interest rates up to 45 percent to prevent an exodus of dollars. Now they are down to 32 percent, and could fall to an almost friendly 10 percent by December, according to Finance Minister Pedro Malan. Businesses were once bracing for an economic contraction of 5 percent or more. Now the outlook is for a milder 2 to 3 percent drop, with a return to growth by early next year. Not even a financial scandal–involving the arrest of one of Fraga’s predecessors amid allegations that the Central Bank passed insider information to commercial banks on the eve of devaluation–seemed to ruffle the market. “People are beginning to believe in Brazil again,” says Jose Augusto de Faria, of ING Barings.
Perhaps they should have had more faith in the first place. In Asia and Russia, the financial crisis was particularly damaging because of the weakness of local banks. Not so in Brazil, where banks had already undergone a drastic shakeout in 1995. And consumers, facing a recession, dug in their heels when threatened with a return to the bad old days of crippling inflation. “Our suppliers wanted to impose 5 to 15 percent increases, but we said no. We knew our customers wouldn’t buy,” says Arthur Sendas, who runs Casas Sendas, a chain of 70 supermarkets. Brazil’s emergency also prodded legislators to make a belated start on overdue constitutional and economic reforms. And credit is due the IMF, which was drubbed for assembling a $41.5 billion rescue package for Brazil last December. Though Brazil devalued anyway, the support bought valuable time.
The improved numbers are a godsend for President Cardoso, who just six months after being re-elected has seen his approval ratings collapse. If Brazilians could vote again, a recent poll showed, he would come in a dismal fourth. With the real on the rise, Cardoso looked relaxed and almost buoyant again. “Brazil suffered just a little bit” from the world financial crisis, he allowed last week. Down at pavement level, however, the damage assessment differs. The government may have just raised the minimum wage a hair, to around $81 a month, but that won’t help the growing ranks of jobless. Unemployment has climbed to a record 8 percent and has reached 20 percent in So Paulo, the country’s industrial engine room, where 1.73 million are out of work.
Last week a paper-plate lunch for the unemployed, sponsored by labor-union and church leaders, drew 4,000 people. After waiting in lines that stretched around the block in downtown So Paulo they ate rice, beans and a bit of beef, washed down with soft drinks donated by Coca-Cola and Volkswagen, companies that have been letting workers go by the hundreds. A few years ago these same workers were proof of the success of the real, the currency that conquered inflation and–as the government liked to point out– pulled perhaps 15 million people into the mainstream economy. Now they are worried about being returned to the backwaters. A World Bank study released last week estimated that every percentage-point drop in GDP will push an additional 3 million Brazilians into poverty.
All that misery has plenty of company elsewhere in the region. Argentina, Brazil’s neighbor and partner in the struggling South American common market, Mercosur, was already in a bad way when the real collapsed in January. Mercosur was the only region where Argentina enjoyed a trade surplus; Brazil’s devaluation suddenly stole the country’s biggest market, while awakening fears of a flood of Brazilian goods, from steel to shoes. The foundering trade pact will get no help from a third member, Paraguay, whose frail young democracy is still recuperating from the ouster of its president in March.
An economically vibrant Brazil, of course, would be a true tonic for the region. But that’s far from ensured. Congress is in the throes of investigative fever, with legislative leaders buried in denunciations ranging from corruption in the judiciary to bailing out shady bankers. Meanwhile, the lawmakers have a backlog of important bills. Last year’s modest pension reform merely slowed the flow of red ink; it will take a new law to stop it. Pending as well is a fiscal-responsibility law that will straighten out the sharing of expenses among state, local and federal governments. Reform of the onerous tax system hasn’t even begun. The political lull could be costly. “The real risk is that the sense of urgency has disappeared,” says da Nobrega. Does Brazil really require a crisis to move forward? If it does, Itamar Franco and his allies still seem willing to help out.
