by Nomi Prins
Mexico was not alone. Given its roller-coaster ride through US monetary decisions and its own litany of scandals, Brazil would do the same.
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BRAZIL: National Politics Meets the Federal Reserve Meets China
QE creates excessive liquidity that flows over to countries like Brazil. Definitely, for Brazil it does create a problem and Brazil will present proposals in that regard to several countries—the US and China—to reach a different agreement not to generate so many distortions.
—Henrique Meirelles, head of the Central Bank of Brazil, November 4, 2010
Whereas Mexico’s lot in the aftermath of the 2008 financial crisis was to walk a fine line between independence and cooperation with the United States, Brazil’s economic and political woes, as complex and chaotic as they were, required a more precarious balancing act to navigate. They also largely revolved around one major player. Henrique Meirelles operated in the shadows of multiple presidents and possessed a footprint that spanned the world. Once head of the Central Bank of Brazil (BCB) and later minister of finance, he was Brazil’s most powerful monetary and economic policy architect at the onset of the twenty-first century. Meirelles was also the most constant force through more than a decade and a half of economic ups and downs and financial and political scandals that made soap operas looks like kids’ cartoon shows.
It was on January 1, 2003, that President Luiz Inácio Lula da Silva (or “Lula”) appointed hawkish, Harvard-educated Henrique Meirelles to run the Banco Central do Brasil.1 Before his appointment, Meirelles had built a solid international financial career at FleetBoston (formerly BankBoston), where through twenty-eight years of work he had become president of that merged bank’s (BankBoston and Fleet Financial group) corporate and global bank.
Meirelles was a man of quiet fortitude, firm and discreet. He operated close to the vest, domestically and internationally. He attained elite status within Brazil but also had solid ties to Washington, DC, and President George W. Bush’s Treasury secretary Hank Paulson. Trained as a civil engineer, his career spanned the public and private sectors. Meirelles received a degree in civil engineering from the Polytechnic School of the University of São Paulo (USP) and an MBA from the Coppead Institute of the Federal University of Rio de Janeiro (UFRJ) and attended the Advanced Management Program (AMP) at Harvard Business School.2
Throughout the years, Meirelles maintained a position at the epicenter of Brazil’s political and monetary saga. His career was a study of well-timed patience and opportunism. His power metastasized through his influence over the path and fabrication of money and his international connections. Around Meirelles’s ascent as a money conjurer and arbiter, then, everything changed, yet ultimately nothing changed at all.
For decades, Brazil had been a monetary policy maverick compared to the rest of the world—by necessity. Since the military dictatorship of the 1980s, Brazil stood out in Latin America for its monetary policies being tied to the economy.3 Levels of exchange rates were used as tools to calm public criticism and insulate the country from currency fluctuations.
The B in the BRICS4 nations bloc, Brazil was of acute interest to the Western (US and European) financial establishment and to the rising Chinese-led Eastern bloc. The BRICS nations, at the time they formed their geo-economic bloc, aggregated regional powers in size, economic performance, and diplomatic influence to counterbalance, in a coordinated way, US hegemony. Brazil took on a major role in that global shift.
OUTSIDE THE VORTEX OF THE US FINANCIAL CRISIS
At first, during the crisis, Meirelles did not blindly follow the Fed’s money-conjuring policies. Instead, he was forced by circumstances to balance domestic requirements against those of external monetary doves espousing cheap money as a cure-all for economic woes.
The strain surrounding these actions pitted Brazilian central bankers against finance ministers in a series of domestic squabbles that became known as “Battleships,” a term coined by André Singer, a Brazilian political scientist from the leftist Workers Party, signifying political-monetary conflicts between central bank and minister of finance leaders.
These disagreements led to governments toppling. They played out in dramatic detail in the national press. Monetary policy decisions had the effect of swaying Brazil from one end of global alliances to another and back again. Meirelles was the central character in that tug-of-war: monetarily, economically, politically—domestically and globally.
Prying open territories for productive or speculative investment was a core US financial policy since the early twentieth century. At an August 9, 2006, meeting with US ambassador Clifford Sobel regarding the foreign business environment, Meirelles promised to use his leverage “behind the scenes” to foster a “more welcoming investment climate” for US business interests in Brazil in return for US support for his central bank power base.
The implication of this request was immense. Meirelles asking the US Treasury secretary to pressure Lula for BCB independence was brazen. Imagine if the Fed chairman chose to enlist the help of China’s minister of finance to pressure the US president to increase the Fed’s independence.
According to WikiLeaks documents, though, Meirelles argued that US Treasury secretary Henry Paulson “in particular would be able credibly to make that point” to Lula and finance minister Guido Mantega.5 Paulson and Meirelles were kindred spirits. They shared the same prestigious alma mater, Harvard, and later, in 2012, Meirelles would become a board member of the environmental organization Paulson co-chaired, the Latin America Conservation Council (LACC), a self-described do, not think, tank of global elite.6
In the two years following that conversation, the focus of foreign bankers on Brazil skyrocketed. Major US banks, notably Paulson’s old firm, Goldman Sachs, scrambled to hire staff in Brazil to boost their ground operations there.7
That foreign attention was rewarded. On April 30, 2008, US rating agency Standard & Poor’s bestowed an investment-grade rating on Brazil,8 enabling US pension funds, previously confined to investment-grade limits, to allocate money to Brazilian securities directly as well as to private equity or hedge funds plying money in Brazilian markets and enterprises. US broker presence in Brazil increased by 60 percent during the lead-up to the financial crisis, from 2006 to 2008.9
Despite the merriment caused by the S&P rating and a US-friendly BCB chief, though, US subprime crisis clouds were steadily forming: liquidity in the US credit markets dried up because of the Bear Stearns collapse in March 2008. Contagion to other markets because of the glut of toxic assets that US banks had dispersed globally was imminent.
Yet in April 2008, President Lula brushed off the impact of that brewing storm: “There [in the United States], it is a tsunami; here, if it comes, you will get one small wave that one can not even surf,” he said.10
Within Brazil’s presidential residence building, dubbed ostentatiously despite its austere Cold War–esque design the Palácio da Alvorada,11 Lula remained unconcerned that US liquidity problems could spill over into Brazil. In fact, in contrast to directives from Fed chairman Ben Bernanke, before the July 25, 2008, monthly Monetary Policy Committee (Copom) meeting of the BCB board of directors in Brasília, Lula urged Meirelles to accelerate the pace of raising rates in order to keep capital flows in Brazil. “Do what needs to be done,” he told him.12
Lula’s views also resulted from the opinions of minister of finance Guido Mantega, who, though usually more a dove, during this period converged with Meirelles’s hawkishness on rates.13 Since 2006, Lula had organized his government around conflicts between right-wing BCB chairman (Meirelles) and left-wing Workers Party minister of finance (Mantega). Like a Brazilian Franklin Delano Roosevelt who worked both sides of American politics, he vacillated between using Meirelles or Mantega to justify government actions relative to public opinion.14
Such rate hikes sent two messages: first, that the BCB preferred inflation control to economic growth stimulation through cheaper money; and, second, the
BCB wanted to continue to accommodate foreign capital inflows seeking higher returns.
Less than two months later, the financial world crumbled. Lehman Brothers went belly up on September 15, crippling the US banking system. The US government and Fed reacted by subsidizing private banks (in particular, the Big Six US banks that were key toxic asset creators). The Fed fashioned an historic bailout program that invoked zero interest rate policy (ZIRP), initiated a strategy of quantitative easing by which the central bank fabricated money to purchase government bonds and other securities, and created massive lending programs for banks with relaxed collateral rules. The Fed coerced central banks worldwide to adopt similar strategies. The G7 central banks opted in; some G20 central banks, like the BCB, did not.
The combination of the crisis and the response of central banks reflected a paradigm shift. Remedies showcased as ameliorating economic fallout instead bolstered private banks in epic ways at the expense of funding real growth in mainstream economies or forcing banks to do so. This led to realignments in the prevailing financial order. In Brazil, this shift caused a political move to the right that would portend many other such swings the world over, including in the United Kingdom and the United States.
During the fall of 2008, the Brazilian stock market (Bovespa) bounced up and down like a yo-yo reacting to each external central bank intervention. After falling on Lehman’s collapse, it spiked on September 19 amid rumors of a US bailout. On September 30, it was boosted by a liquidity injection courtesy of six main central banks—Bank of Japan, the Federal Reserve, the European Central Bank, Bank of Canada, Bank of England, and the Swiss National Bank.
It leapt on confirmation of a European financial system bailout on October 13. On November 24, it rose on news of an extra US bailout capital injection of $20 billion for Citigroup, a bank with strong historic tentacles in Brazil, Mexico, and throughout Latin America.15 But these were interim spikes. The index lost half its value from May to October 2008 as foreign capital fled to home countries, devastating local markets, people, and firms in its wake.
Major central banks took advantage of the financial crisis to fabricate money and support key private banks under the guise of helping mainstream economies. Peripheral financial agents rushed to determine which countries would be the recipients of this resulting “hot money.” The BRICS countries proved enticing to Western speculators because they had not been hammered by the subprime crisis as had the United States and Europe. China offered a large domestic consumer base and cheap labor force but political disparities. Brazil offered a wide interest rate differential owing to its high rates and, it seemed at first, its solid affinity with the West.
Generally, during a global financial crisis, the primary concern of emergent countries like Brazil flips from attracting capital to stopping capital flight. The name of the game is to keep money where it is and build proverbial dams to contain outward flows.
Meanwhile, the US financial crisis spread like malignant cancer, killing healthy economies along the way. Liquidity concerns finally manifested within the halls of Brazil’s identical government buildings. On December 3, 2008, Lula switched gears and pressed Meirelles for rate reductions (in keeping with US policy to keep the wheels of its financial system greased). In a public ceremony in Brasília, he claimed rates were “above what common sense indicates that we should have.”16
On December 16, the US Fed cut rates to zero.17 Still, credit crunches hampered global markets. Brazil suffered a small recession in 2009 (with GDP at–0.2 percent). Lula was facing the demise of his rosy economy at the hands of US bankers and of his monetary policy bend at the hands of the Fed. Even car factories in the ABCD18 region in São Paulo, where he had worked as a young labor union leader, were cutting jobs.
With the onset of recession, Mantega was able to strengthen his position relative to Meirelles. There was a political reason for that: Lula needed to sustain economic growth to support the 2010 presidential election of his protégé, chief of staff and former energy minister Dilma Rousseff.19 Mantega reasoned that adopting lower rates could be effective in that regard.20 Meirelles promised to reduce the SELIC (the Special System for Settlement and Custody) key rate at the January 20, 2009, meeting. Though he dismissed claims that he caved to the whims of Lula and Mantega, his actions indicated otherwise.
NO RISK, REALLY?
The “balance of power” battle between fiscal and monetary policy advocates raged on. But when it was politically expedient, Meirelles turned dovish himself. He began chopping rates on January 29, 2009, eventually cutting the benchmark rate to 8.75 percent by March 2010 and to 7.25 percent by October 2012 (the lowest point since the BCB’s inflation target was adopted in 1999). Thus he temporarily adhered to the Fed’s policy.
Brazil’s currency, the real, held its own in the face of worldwide financial chaos. At the beginning of 2009, before the real began to be crushed relative to the US dollar in the second quarter, major Brazilian banks such as Itaú Unibanco Bank, Bradesco Bank, Bank of Brazil, and BTG Pactual Investment Bank took advantage of the real’s strength (some later called it an overvaluation) and the crippled state of foreign banks. They bought the Brazilian operations or shares in foreign banks operating in Brazil. Branches of Swiss Bank, Union Bank of Switzerland (UBS), and the Portuguese Banco Espirito Santo were among the most attractive targets.
The phenomenon had precedent. In May 2006, Bank of America Corporation agreed to sell its BankBoston (Meirelles’s old company) operations in Brazil to Banco Itaú, Brazil’s second-largest private bank.21 The deal resulted in Bank of America gaining about 7.4 percent of the equity of Itaú and becoming a board member. Other Brazilian banks bought the Brazilian operations of foreign banks like HSBC and Citigroup. In November 2008, Itaú Unibanco Bank announced its purchase of beleaguered American International Group’s (AIG) 50 percent share in Brazilian insurer Unibanco AIG Seguros.22 Top-tier investment bank BTG Pactual made several foreign acquisitions between 2009 and 2013 in South America, the United States, Switzerland, and Italy.23
To commemorate the first anniversary of the financial crisis in September 2009, Brazilian newspaper Folha de São Paulo asked Meirelles about the stability of Brazil’s banks in the crisis “aftermath.”24 Meirelles assured the press that the dangers of another systemic crisis that could harm Brazilian companies with US dollar and derivatives exposure had passed. He echoed then-prevalent Fed sentiment promoting the idea of central bank collusion, “The concert of actions solved the problem of liquidity.” In the twenty-first century, G7 and central bank alliances were the financial equivalent of post–World War II ones.
When asked whether the real’s appreciation would create new excesses in the derivatives market, Meirelles exuded an optimistic, free market defense, befitting his days at Harvard. “Recent losses taught a dramatic lesson, not only in Brazil, but worldwide,” he said. “Today no one would take the kind of risk that was assumed before.” But he defended his decision early in the crisis to wait until January 12, 2009, to reduce rates in contrast to other central banks’ moves: “Credit markets were still dysfunctional… inflation expectations were still very high. A rate cut would only generate more volatility and insecurity.”25
On the pervasive issue of bank spreads (the difference between the rates at which banks take money from the BCB and the rates they charge for lending it out), Meirelles also bowed to free markets: “The main factor that will lead to the fall of ‘spreads’ is increased stability and competition.” If other banks lowered their spreads, he reasoned, Brazilian banks would, too. Eventually.
But toward the end of the year, with growing pressure on his actions in light of oncoming recession, Meirelles switched gears. He slashed rates from 13.75 percent to 8.75 percent between January and December 2009.
CURRENCY WARS
Whether because of those rates cuts, expansion of credit for the middle and lower classes, exemption from various sectors of the economy, or freezing of some industry taxes, the economy did
recover and grow. Rather than shaking hands over a shared leadership victory, Mantega and Meirelles sparred over policy more frequently, blaming each other for Brazil’s remaining problems, including high public debt, low wages, and a fiscal deficit, and clashing over how to address them.
On April 16, 2010, Mantega voiced his concerns that Meirelles would turn around and raise rates to curb inflation and cool off the pace of the “strong” economic recovery. He considered Meirelles’s projections of 7 percent GDP growth “exaggerated.”26 He was wrong. Brazil enjoyed 7.5 percent GDP growth in 2010, which is why Lula ended his second term with more than 80 percent of popular support. Meirelles ignored Mantega’s concerns, choosing instead to embrace a combination of inflation fighting and foreign capital attracting that came from higher rates.
The BCB switched gears again and raised the SELIC to 9.5 percent on April 27, 2010.27 Unlike US markets, which had reacted affirmatively to zero percent interest rates because they made it easy for big speculators to bet on the markets and for big companies to borrow money cheaply with which to buy their own shares, the Brazilian stock market fluctuated in its reaction to rate hikes, tending to react favorably because rate hikes signified the central bank was at least trying to combat inflation in the country.
Rates returned to historic highs throughout 2010 as Meirelles continued raising rates to 10.75 percent. Consistent with his hawkish nature, he used inflation rate growth (from 4.3 percent in 2009 to 5.9 percent in 2010) to anchor his rate hike policy, even though inflation remained within the BCB’s target band of 2.5–6.5 percent during that period. The result was that these comparatively high rates attracted foreign capital flows seeking greater returns relative to what was available in their home, mostly G7, countries.
