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Analysis
Political crisis and street power

Political crisis and street power

Brazil: ‘Irrational doom and irrational exuberance’

by David Smith in Buenos Aires

Mon 21 Mar 2016

Normally, street power makes the financial markets fret. Not so in Brazil, it seems. The future leadership of Latin America’s biggest economy will be decided, almost certainly, by demonstrations in Brazilian cities in the next few weeks. Investors around the world, hoping for positive change of the sort seen in neighbouring Argentina, are hanging avidly on the outcome. 

‘Brazil right now is between two worlds, two impulses, two futures,’ says one of the country’s leading commentators. ‘One is constitutional democracy and the rule of law. The other is autocracy designed to circumvent the law. And the heart of the matter is an economic crisis that affects all. It is a crisis that motivates almost every Brazilian to take to the streets, for one side or the other.’ 

The extraordinary developments of the past fortnight, in the political arena of Brasilia and on the São Paulo stock market, constitute a see-saw tale of political intrigue and financial gyrations. 

Early on 4 March Luis Inacio Lula da Silva, the former president, was arrested as part of corruption investigations into the country’s state oil giant Petrobras. Within hours the São Paulo Bovespa stock index jumped 5%, and the real reversed months of decline against the dollar. At one point in the days that followed the currency moved 10% higher on the year, with the market up 25%. 

But then Lula da Silva and his protégée, President Dilma Rousseff, chose decisively to fight. Rousseff placed Lula da Silva at her right hand as chief of staff and de facto prime minister, giving him immunity from prosecution unless his case went to the Supreme Court – a body stacked in their favour. 

In the morning, the markets and the real plummeted. Come lunchtime, when a judge blocked Lula da Silva’s appointment on the grounds that it prejudiced the case against him, the markets rebounded, climbing 6% at one point. 

‘This is irrational doom, and then irrational exuberance,’ to quote one of São Paulo’s leading bankers. 

Small wonder that the financiers want change. Brazil is mired in its worst recession in a century, with a fiscal deficit of almost 11% of GDP, double-digit inflation, and the major ratings agencies having downgraded the country’s sovereign credit to junk status. Rousseff herself is facing impeachment. 

The president and her predecessor hold strong cards. Impeachment requires two-thirds of the Congress voting in favour. Despite defections of late, Rousseff and Lula da Silva probably have the votes in the short term, given their obvious will to fight using every tool at their disposal. Yet if millions take to the streets against them, as they did in mid-March, then the writing may be on the wall: street music to investors’ ears. 

David Smith, OMFIF Advisory Board member, represented the UN Secretary-General in the Americas between 2004 and 2014.

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