Brazil: US fixes outcome of October elections

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FRFI 169 October / November 2002

The Brazilian masses are demanding political solutions to their misery and a congressional shift to the ‘left’ is predicted for the October election. So the USA has changed its foreign debt tactics. It has massively increased loans to the Brazilian banking system with the aim of tying the hands of the next Brazilian government. All party leaders in the coming election have publicly agreed to stick to the current financial policy after the election in return for the massive sums offered!

In July the Brazilian real fell by 20% whilst in the first three weeks of the month, $1.1 billion was removed from the country, double that sent abroad in June. Total Brazilian public debt is now 55% of GDP, up from 49% three years ago. Brazil had a $264 billion external debt in July, nearly twice that of Argentina. However, although the country is currently short of cash, it is not yet insolvent like Argentina.

The October elections seem certain to be won by Lula (Luis Inacio Lula da Silva), who has been building the Workers Party for over 30 years. Ciro Gomes’s Workers Front, a coalition of ‘left nationalists’ and ‘right’ liberals is second in the polls. The ruling party is the Socialist Party of Brazil, PSdoB; its candidate, Jose Serra, is backed by business and finance but is trailing a humiliating third.

The US must tie the hands of Lula and Ciro Gomes. So on 7 August, the IMF offered a ‘virtual’ loan of $30 billion to Brazil, far more than the $10-$20 billion expected by Brazilian negotiators. $6 billion will be supplied this year; the remaining 80% will be provided next year, on condition that IMF terms are met. In this way the elections of 5 October can take place before a major collapse, whilst a huge threat is posed to all parties after the elections.

Stock markets reacted euphorically the day after the announcement, but the international banks can see great danger to their interests in the deepening crisis in Latin America, and they continue to reduce their credits. On 9 August, the day after the IMF loan announcement, the World Bank offered another loan of $2 billion, extending its credits to $4.5 billion, whilst the Inter-American Development Bank agreed to extend its loans by $1 billion to $2.5 billion. Nevertheless the risk rate for investments rose by 13.76%, and the exchange rate fell 3% to 3.26 reales per dollar, and now sits at 3.23. The IMF and World Bank loans let the international banks withdraw funds from Brazil, leaving the government with a debt created to pay for the process. Risk is transferred from private business to the state, which will make the workers pay. There is now a private dollar flight from Brazil, all the better to flood back in again to buy up property even more cheaply if the demands of the workers can be crushed.
Alvaro Michaels