- The Washington Times - Sunday, October 6, 2002

The meteoric rise of Brazilian presidential candidate Luiz Inacio da Silva, widely referred to by his nickname, "Lula," has been accompanied by a plunging Brazilian currency. Today, Lula is poised to win a wide plurality, and perhaps thin majority, of the Brazilian vote. Given the size of Brazil's gross domestic product, and its potential to impact the global and U.S. economies, it is unfortunate that Lula will most likely be the man behind the levers of Brazilian power. The global economic doldrums, especially in Turkey, Japan, Germany and (to a much lesser extent) America, could intensify the international impact of Brazilian financial woes.
Brazil is the world's ninth-largest economy and America's 13th-largest trading partner, with $40 billion a year exchanged in bilateral commerce. Major U.S. banks are heavily invested in Brazil. Citigroup alone has $9.3 billon of outstanding cross-border claims in Brazil, according to SEC filings. The big international banks, including U.S. banks, have $66 billion in claims outstanding in Brazil. Foreign companies have about $420 billion invested in the country, with U.S. companies being the lead direct investors. Brazilian purchases of U.S. goods drive about 3 percent of the sales of America's 100 largest companies. Alcoa, Coca-Cola and Whirlpool generate between 5 percent and 6 percent of their sales in Brazil.
But a full-blown Brazilian crisis could have its most profound global impact indirectly. Given Brazil's size, it is considered a lynchpin of financial stability in emerging markets. If its situation worsens under Lula's stewardship, then a so-called contagion effect could bring down other countries that are precariously balanced.
The question remains, though: Would Lula, a former union leader with scant political experience, bring Brazil to its knees financially? According to the latest polls, Lula would win about 49 percent of valid Brazilian votes, just a hair away from the majority he needs to win an outright victory. If the election goes to a runoff on Oct. 27, the polls indicate he would win by a wide margin.
The leftist candidate is a wild card. Investors lack confidence in his leadership, as evidenced by the drop in Brazilian stocks and currency, concurrent with his rise in the polls. His popularity has checked any rally a $30 billion loan from the International Monetary Fund (IMF) could spur even in the short-term. The Brazilian currency has hit record lows since the IMF awarded its loan on Aug. 7, sinking 28 percent. Brazil's benchmark bond, due in 2014, is down 18 percent since Aug. 7, a yield of 25 percent.
Lula alternately speaks the language of demagoguery and "marketese," appealing to both Brazil's increasingly disgruntled populace and well-heeled market players. On Monday, Lula said the investors selling off Brazilian assets were committing "economic terrorism" on the country, and that, if he could identify the culprits, he would "have them arrested." Such comments don't demonstrate much thoughtful consideration of Brazil's downturn.
Lula has pledged to practice financial responsibility and has picked a wealthy industrialist, Jose Alencar, as his running mate to bridge relations with the business class. And the candidates Lula is reportedly considering for Central Bank president are seen as market-friendly heavyweights.
Still, any president would have a difficult time handling Brazil's debt of about $300 billion, 40 percent of which is tied to the dollar. One must hope that Lula will deliberate carefully on his decisions.

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