MercoPress. South Atlantic News Agency

Financial scare in Brazil

Markets reacted positively to the measures announced on Thursday by the Brazilian government to help restore confidence among investors, although doubts about the long term capacity of the country to repay its foreign debt remain.

Two factors are having a direct impact on the nerves of investors and holders of Brazilian bonds: the consolidation of left wing (former Marxist) candidate Luiz Inacio Lula da Silva as the most likely successor of President Fernando Cardoso since he almost doubles the ruling coalition candidate in vote preference; secondly contrary to what was expected by international financial circles, the long shadow of the ongoing unresolved Argentine situation is generating contagion in the region.

With this in mind the Brazilian government on Thursday anticipated it would make use of an IMF 10 billion US dollars stand by credit granted last year when the Argentine situation was brewing; the primary budget surplus for fiscal years 2002 and 2003 will be increased from 3,5% to 3,75%; the minimum immobilized international monetary reserves is reduced from 20 to 15 billion US dollars, and finally the government will acquire sovereign bonds maturing in 2003 and 2004.

With IMF funds and extra monetary reserve disposal the government expects to curtail speculation against the local currency and have sufficient margin to influence the bond market, forcing the country risk index to drop and hopefully convincing bond holders to retain them.

On Friday the World Bank announced it was extending a one billion US dollars loan to Brazil for the education, health and energy sectors.

A jittery market will be looking during the weekend at the latest vote intention polls, which should reflect on financial markets beginning next Monday.

Latest polls indicate Mr. Lula counts with almost 40% of vote intention and Mr. Jose Serra, the ruling coalition candidate 22%.

However Mr. Lula bitterly claims that the Brazilian government is not at all absent from the current financial instability, since "President Cardoso is determined to scare the middle class from voting for me".

Businessmen, bankers and investors can't forget that Mr. Lula a former union leader and unsuccessful presidential candidate on previous occasions, was known for preaching the need to "restructure the terms of Brazil's foreign debt".