MercoPress. South Atlantic News Agency

Financial storm in Brazil

With just two weeks to the presidential election that according to polls anticipates a possible clear victory in the first round of opposition candidate Luiz Inacio Lula da Silva the Brazilian currency is plummeting, financial markets are sliding and investors rejecting Brazilian bonds.

While inflation in Brazil is below 8%, the Real has experienced a 35% devaluation, 15% only so far this month, and with no prospects of receding. The US dollar was selling early this week in Brazilian exchange markets at 3,80 Reales, far exceeding last July's record of 3,60. The country risk at 2195 points on Tuesday was only behind Argentina and Nigeria.

"The volatility is because the market is anticipating a Lula victory in the first round, even when Mr. Lula has 44% vote intention, but more than double his closest competitor, Mr. Serra with 19%", said economist Otavio de Barros.

"Financial tensions will only recede after the election when the winner names his economic team and program", added Lloyds bank Sao Paulo branch, Odair Abate. "When private companies and even the government, are unable to roll on their standing debts, they are forced into the market to purchase dollars to honour debts, rocketing the price", said Eduardo Texeira from the stock broker company Elite.

Foreign investors fear that if one of the opposition presidential candidates wins the election, Brazil might not be able to honour its debt, which since adjusted to the US dollar has increased to an unsustainable 62% ratio of GDP, according to Brazil's Central Bank sources. In the last leg of the electoral campaign Mr. Lula admitted that "Brazil's economy was fragile and therefore we can't play around. Brazil is not a banana republic, we're not Argentina, and this country will not default".

However Mr. Lula shocked markets when he anticipated that if elected, he would replace the current president of Brazil's Central Bank, Mr. Arminio Fraga, who's considered the architect of the country's recovery following the financial crisis of 1999 when the Brazilian currency collapsed.

"Our Workers Party has highly qualified people and we also have highly qualified people close to us", said Mr. Lula, adding that "we'll name a Central Bank president in line with our program and committed to our ideas". "United States should have no fears about me, I'll be doing the same they do for the American people, that is defend first of all the interests of our people", stressed Mr. Lula.

The former trade union leader who is in his fourth presidential bid, said that he will not tolerate that Brazil be treated in multilateral organizations and by developed nations as a small country.

"The same way Brazil does not talk about the forging of US corporations balance sheets or cosmetic accountancy, we will not tolerate interferences in our domestic policy", underlined Mr. Lula.