MercoPress. South Atlantic News Agency

Indexation threatens the Real

The Plan Real that seven years ago for the first time created in Brazil a relatively stable currency, is now challenged by the same forces that inspired its formulation. Ravaged by decades of hyperinflation, and with an electorate longing for stability, Brazilian authorities created in 1994 a strong Real, that supposedly ended the indexation of all prices, services and rates in the economy, plus enforcing contracts with a minimum term of twelve months. With a steaming economy, a more responsible budget management, the Real plan worked and the electorate rewarded the then Economy Minister Fernando Cardoso with the presidency, and a constitutional reform that ensured him a second term. However in January 1999, international speculation and a softening in budget management for electoral reasons, forced Brazil to devalue the all mighty Real 50%. Twelve months later foreign investors demanded indexation of public utilities services, a first step that gradually began to spread to other basics such as fuel, mortgage, education, but not salaries. Inflation has been so far acceptable by Brazilian standards, below 10%, but depreciation of the Real against the US dollar has not ceased and in 2001 already reached 30%. No wonder trade unions have anticipated they will strongly demand trigger clauses tied to inflation in labour contracts, as indexation keeps spreading. But the basic message is that Brazilian expectations do not coincide with the government's optimism about the strength of the Real and the overall stabilisation plan. The vital question is then how will the electorate react just over a year from now when president Cardoso's successor will be elected. Latest polls indicate the Socialist led opposition doubles the ruling coalition. "If the government continues along this soft line, it's the end of the Real plan", predicts Delfim Netto, former Brazilian Finance Minister for almost a decade