Blind Eyes Cast On Disaster in Brazil

Blind Eyes Cast On Disaster in Brazil

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Public spending had become out of control, subsidised credit was still being offered and price controls were used on the monopolist state-owned energy companies to hold inflation. The books had been proverbially cooked.

Surrounded by the consequences of disastrous economic policies and corruption scandals, the Brazilian president Dilma Rousseff watches her government collapse.

“I protest against the coup initiatives and their conspiracy acts,” said Dilma Rousseff in her speech, last week, at a major syndicalist event. It is self evident that no person in power will use the word, ‘coup’ unless playing the victim is their last alternative to remain in office.

Facing a projected two-year recession, a billionaire in a corruption scandal involving the state-owned oil company Petrobras and 7 per cent approval rating (the lowest of any democratically-elected leader during the country’s history) the Planalto has been overtaken by the fear.

Last Tuesday, Moody’s, one of the big three ratings agencies downgraded Brazil’s credit to Baa3. The stance is still a euphemism in comparison with the junk rate (BB+) delivered by Standard & Poors in September. Both evaluations are consequences of the abandonment of the relatively austere and free-market fundaments settled by the Plano Real, an economic plan developed on the mid-1990s that reformed the Brazilian fiscal policy, deregulated the economy, privatised inefficient state-owned entities and removed significant barriers to international trade. The Plano Real shrank an annual inflation rate of 190 per cent to 3 per cent, built confidence and stability for the astronomical economic growth that occurred during the early 2000’s.

The effects of the global financial crisis induced Lula da Silva’s (Labor president 2003-2010) cabinet to move the economic policies towards a developmental agenda through an expansion of subsidized credit offered by state-owned banks. This shielded Brazil from the crisis in the short term, leveraging the GDP, the wealth and the employment levels and guaranteed the election of Mrs Rousseff in 2010 – Mr Silva’s successor.

The seemingly unlimited credit poured into Brazil induced the economy to expand but was not followed by a proportionate expansion of the market, promoting unnecessary investments, greater inflation and debt increases, consequently moving the economy towards an unsustainable situation.

The effects of the irresponsibility appeared more clearly in 2013, a year before the presidential elections, forcing the government to desperately mask the disaster. Public spending had become out of control, subsidised credit was still being offered and price controls were used on the monopolist state-owned energy companies to hold inflation. The books had been proverbially cooked.

In addition to this was the superannuation deficit, effectively creating a ticking time bomb in the government’s budget. A bomb that exploded after Mrs Rousseff’s 2015 reelection.

The results were devastating – a projected recession of two years, and the first fiscal deficit since the implementation of Plano Real in 1994. Annual inflation levels are expected to reach 9.5 per cent, a 40 per cent devaluation of the Brazilian Real against the US Dollar and, consequently, an erosion on the investor confidence. In the economy with the highest standard interest rate of significant economies (over 5 per cent), a high public debt becomes an even greater challenge.

A new cabinet was sworn-in early last year. The economic team is now led by Chicago-trained Joaquim Levy in a move intended to cool the markets with a much needed air of heterodoxy. Unfortunately for Brazilians the misalignment of Mr Levy’s economic agenda and the views of the current president have cost Brazil months in bureaucratic inertia.

In October 2015, Standard & Poor’s announced their downgrade of Brazil. The cabinet desperately presented a rush-made cutting spending package together with a new tax on financial transactions proposal. The tax is the only alternative to cover the budget deficit until 2016, but it is undeniable how ludicrous this when you consider that Brazil has one of the lowest levels of tax compliance in the world. So long as the government does not present a pragmatic and intelligible solution for the crises, approval ratings will slide and credibility will continue to erode.
On top of Mrs Dilma’s economic mess sits the cherry. This cherry takes the form of the largest scandal in Brazillian history. The Labor party and its coalition are being investigated for a money laundering scheme that is estimated to had transacted over 20 billion Reals (approximately 5 billion American Dollars) on bribes and campaign funding between contractors and politicians on over-budget projects for the state-owned oil company Petrobras.

From congressmen to governors, 47 politicians are being investigated and 42 involved have already been convicted, including 2 former Petrobras’s executive directors, a former Labor congressman, and treasurer.

In Mr Silva’s government, Mrs Rousseff was the Minister for Mines and Energy, as well as a director on the board of a company currently being investigated for involvement in the corruption scheme. Mrs Rousseeff denies any involvement.
A scenario of serious economic crisis caused by an irresponsible, and corrupt government makes calls for the impeachment of the current president all the more likely.

According to the Brazilian constitution, administrative improbity form good grounds for impeachment calls. The formal process requires that this call must be approved by the President of the House of the Representatives and judged by the Senate. Since the beginning of Mrs Rousseff second term, fifteen impeachment motions have been moved against her.

Curiously, the strongest one has been led by a former founding member of the Labor Party, Helio Bicudo. Relevant procedure is still being carried out by the President of the House of the Representatives on this motion, however a different outcome is highly unlikely.

The only chance ordinary Brazillians have to be heard is at the next general election.

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