by Nomi Prins
At the time, an expansion of credit to families allowed them to partake in the economic upturn. Almost the entire middle class bought new cars and traveled abroad for the first time. The idea of “doing Miami” to buy American products on the cheap because of the favorable exchange rate became common. Never had Brazilian families traveled so much and purchased so many new automobiles. This was the main reason for Lula’s expansion of the economy and high approval.
Until the autumn of 2010, the BCB refrained from intervening in the local currency market because public sentiment about monetary policy and the economy itself were pointed upward. But that feeling was short-lived. During September 2010, as both became shakier, the BCB changed its strategy and intervened by as much as $1.5 billion in a single day, averaging $1 billion a day for two weeks—or ten times its prior daily average—to contain the new problem of overvaluation of the real resulting from excessive foreign capital flows and speculation.
It was Mantega who famously coined the term “currency war” and called global attention to the brewing conflict that underpinned these capital and trade flows. He used the term to describe how other central banks were lowering or manipulating exchange rates to give their own economies an advantage from a trade perspective, rendering their exports comparatively cheaper. On September 27, 2010, he proclaimed, “We’re in the midst of an international currency war… this threatens us because it takes away our competitiveness.”28 According to Mantega, if you weren’t fighting the war, you were already losing it. Brazil’s currency was appreciating, making its exports more expensive, which contributed to Brazil’s worst trade balance in eight years.29
The real continued to appreciate throughout 2010. The positive by-product of that was the rising stock market. Mantega positioned himself and the government to take credit for that. Indeed, he claimed the market “owes its progress to Lula” in response to rumors that the government’s new financial tax on foreign exchange transactions was enacted to mitigate real appreciation.30
Whereas Meirelles had raised interest rates, which subsequently attracted capital inflows, Mantega countered by imposing a new tax to fight real overvaluation. The Credit, Exchange and Insurance Tax (IOF) applied not only to international transactions but also to domestic credit operations, especially credit cards. But this measure failed to temper the appreciation of the real versus the US dollar. The strong real hampered exports’ competitiveness.31 Mantega believed the extra foreign tax would curtail real overvaluation. It didn’t really, but some economists claimed it would have been worse without this measure.
THE BEST OF TIMES
The October 31, 2010, presidential election was set to take place amid the Brazilian economy’s recovery from the US financial crisis shock and early 2009 recession. The country was headed to close out 2010 with 7.5 percent GDP growth. It was a stellar year.
Plus, Brazil remained in foreign capital attraction mode. Its private equity and hedge fund industry had garnered increasing international interest.32 Brazil’s hedge funds had already grown by 23 percent in 2010 compared to 2009. Private equity assets reached $36 billion in 2009 from $6 billion in 2005.33 The notion that the crisis was over was widely promoted by the Fed, and yet cheap conjured-money remained policy and meant more capital oozing in. Even pension funds, which had gotten burned when the stock markets tanked in 2008 and 2009, were again seeking risky investments, pre-crisis lessons unlearned.
The National Bank of Economic and Social Development (BNDES), Brazil’s development bank, joined the party to stimulate national speculation activities, plowing $1.1 billion into local private equity funds. As a result, in 2010, private equity funds reflected a higher proportion of GDP for Brazil than they did in most other emerging markets.
This meant more battleship fights over rates and hot money loomed. In a November 13, 2010, interview at the Seoul G20 Summit, shortly after Dilma Rousseff was elected president, Mantega jumped the gun—and over Meirelles—to confirm that the BCB would cut the SELIC in 2011. “How much it will fall, I don’t know,” he said, “but I can assure you it will fall.”34
Mantega and Rousseff had taken some similar positions as ministers under Lula, but they were ideologically distinct. Mantega was a Workers’ Party economist who had helped write the economic programs of Lula’s campaigns in the 1990s, and he became Brazil’s first minister of finance since its Constitution (1988) to the leave government without taking a job in the private sector. Mantega and Rousseff’s joint thinking was that if the BCB cut rates, it would increase local liquidity and lending and decrease the strength of the real, which would benefit Brazil currency-war style.
Mantega vowed Rousseff would seek a balanced budget by the end of her term in 2014 along with a reduction in net debt-to-GDP from 41 percent to 30 percent. He cited her plans to reduce federal spending and subsidies to the state development bank, a part of a deal with the BCB for lower rates in return for austerity measures. Mantega knew that without something in return, it would be impossible to convince the BCB to cut rates. His decision was to offer austerity—even if austerity would hurt the middle and lower classes.35 But he was smart and put “the blame” for austerity on the planning minister.
Rousseff had been elected over rival Jose Serra from the right-wing Brazilian Social-Democracy Party (PSDB) by a vote of 56.05 percent to 43.95 percent. As her vice president, Rousseff selected Michel Temer, head of the PMDB, as part of the first formal deal between her Workers’ Party (PT) and the Brazilian Democratic Movement Party (PMDB).
Against Lula’s wishes, Rousseff changed the guard at the BCB. Inflation hawk Henrique Meirelles got the boot. The dove Alexandre Tombini became chairman on January 1, 2011, when Rousseff took office.
In Tombini, Rousseff chose an economist from outside the financial markets in a bid to block critics’ cries about eroding BCB autonomy. Career public servant and former senior adviser to the executive board at the Brazilian representative office of the International Monetary Fund, Alexandre Tombini fit the bill because he was the architect of Brazil’s inflation target system and thus was respected by the financial markets. In addition, he had domestic and international perspective, having graduated with a degree in economics from the University of Brasília (UnB) in 1984 and earned his PhD in economics from the University of Illinois at Urbana-Champaign (an orthodox but pragmatic economics department).
After being ousted from his position, Meirelles received at least twelve job offers from the private sector, among them the presidencies of Barclays and Goldman Sachs in Brazil. He chose a position at J & F.36 From 2012 to 2016, Meirelles assumed the chairmanship of the advisory board of J & F, the holding company for the Batista brothers, Wesley and Joesley, which included the infamous José Batista Sobrinho, or JBS.
The BCB routinely fought for autonomy relative to the Brazilian government. When Meirelles’s contrarian policy of hiking rates into 2009 caused a recession, the BCB lost symbolic power. Thus, in 2011, Tombini began his tenure forced to accept a deal with Mantega37 and President Rousseff whereby he would cut rates in exchange for promoting fiscal austerity.
The ideological battle around the simple mechanics of raising or lowering rates was about more than direction. It waged over the thorny issue of how to treat foreign money flows in a way that was best for Brazil. For, in Brazil, as in many developing nations, inflation often reared its head as a fierce and fickle beast, pitting politicians and central bankers against each other and battering a nation in the crossfire.
Rousseff’s choice signified that Brazil would follow the United States and Europe and embrace lower interest rates.38 Meirelles was accused of keeping Brazil’s interest rates too high for too long. Private banks in Brazil, which had benefited from higher rates, were sad to see him go. He would not forget his displacement. The switch showed Rousseff distancing herself from her mentor, Lula. Regardless, it seemed the BCB would act in concert with other major central G7 banks. But what worked for them wouldn’t necessarily work for Brazil.
In early 2011, because the flow of speculative foreign capital financed with conjured money that spewed into Brazil concerned Mantega, he launched a personal crusade for jurisdiction over foreign capital controls.39 “We oppose any guidelines, frameworks or ‘codes of conduct’ that attempt to constrain, directly or indirectly, policy responses of countries facing surges in volatile capital inflows,” he told the IMF’s steering committee on April 16, 2011.
What he really wanted to do was keep a lid on capital flow volatility. But neither the IMF nor any major country agreed with him. To the United States, especially, loose financial borders meant a country was on the path to becoming “developed”—the financial equivalent of nirvana. Combined with zero-to low-cost Western money, it was a policy of neoliberalism on steroids.
As foreign speculators stormed into Brazil in pursuit of quick returns, through quick bets on purchases of private equity firms or otherwise, at first new BCB head Tombini greeted them with open arms and loose regulations. American private equity (PE) funds bought chunks of Brazilian ones. In September 2011, US PE giant Blackstone paid $200 million for a 40 percent stake in Pátria Investimentos.40 JPMorgan Chase’s hedge fund, HighBridge, bought a majority stake in Gávea Investimentos, a $6 billion Brazilian fund owned by Armínio Fraga, BCB chairman before Meirelles (during Fernando Henrique Cardoso’s presidency).
Rousseff’s election marked the end of Meirelles’s long reign at the BCB. With Tombini at the helm, BCB fully switched gears to rate reduction mode in line with the big Western central banks. (Meirelles had cut rates at a point, too, but against his will and always while threatening to raise them again.) On September 1, 2011, the BCB cut rates to 12 percent (from 12.5 percent). Rates hit a low on October 11 of 7.25 percent. It took six months—until April 18, 2013—before they rose again (to 7.5 percent). Tombini had earned his nickname “Pombini,” Portuguese for dove.41
In the United States, the Fed deployed aggressive quantitative easing measures, buying billions of dollars of government and mortgage bonds in exchange for adding liquidity, or cheap money, to the market and big banks. The ECB responded to the Greek and other local crises with similar measures. But this global embrace of zero interest rate policy (ZIRP) and later negative interest rate policy (NIRP) presented an international conundrum to banks in developed countries that didn’t pursue the same policies. For, if every central bank on Earth chose that same path, financial giants in core markets couldn’t extract mega-returns from developing ones. Emergent “safe” markets with relatively high interest rates were required to protect the wealth of the speculator class from core countries. Asset bubbles bolstered by conjured money grew everywhere. In places like Brazil, they were increasingly reliant on foreign flow.
There was another problem that affected the local population and businesses. Private banks in Brazil weren’t lending cheaper money to regular customers. Credit restriction was causing difficulties across domestic business and class lines as well as anger toward the private banks. As a result of this tension, on May 26, 2011, the Federation of Industries of São Paulo and Unified Workers’ Central labor force union added their voices to the chorus of groups demanding changes in private banking lending policy. The union called for a “reduction in the spread of banks”42 and a reduction of benchmark interest rates. It endorsed BCB proposals of increased purchases of US dollars (or foreign exchange [FX] swap reverses) to protect private companies against future strengthening of the real.
Big private Brazilian banks like Itaú and Bradesco were reticent about reducing their lending rates. Their lending policies were based on the higher rates of the past, not the lower ones of the present. So, banks charged higher spreads, or greater interest rates, on loans relative to prevailing central bank interest rates, rendering the cost of getting credit higher for consumers. The BCB and government were equally unhappy. Private banks were using cheaper money to increase their profits, but not help the local economy. Their obstinacy reduced Tombini’s power over credit supply and caused him great angst in terms of personal political capital in fighting for credit spread reduction to help ordinary citizen borrowers.43
To assuage his growing number of critics, Tombini stressed that reducing banking spreads was a “government priority.”44 From a regulatory perspective, however, just like in the United States, there was no way to force banks to lower their rates and expand their borrower base. The matter highlighted the power of private banks over politics. A month later, Mantega joined the public outcry, calling the prevailing level of spreads “absurd.”45
This went on, to an extent, regardless of who was in power, with lending rates for some borrowers reaching as high as 400 percent per year.46 But some concessions were made along the way. On April 10, 2012, Mantega met with Murilo Portugal, president of the Brazilian Federation of Banks (Febraban), to reason with him on the matter.47 Portugal was having none of it. He countered, “We need to reduce the costs of financial institutions so the ‘banking spread’ and hence interest rates can be reduced.”48 To him, that meant reductions in reserve requirements, taxation for social contributions, and looser regulations for pension funds. He wouldn’t capitulate to Mantega without holding a ransom over his head.
Mantega was incensed private banks were trying to “throw the bill back to the government.”49 Banks held firm. They presented twenty different proposals to the government for how they would agree to reduce their lending rates. Portugal also wanted a reduction in compulsory reserve levels that stood at 55 percent of deposits, “a slice above the level practiced in the rest of the world.”50
Reducing reserve requirements (RRR) was another money-conjuring ploy enacted by various central banks, notably the People’s Bank of China. Requiring private banks to hold less capital in reserve in the event of a financial emergency meant that banks were able to keep more of that capital on hand. The assumption was that banks would then lend whatever they didn’t keep in reserve at their respective central banks. In practice, though, big global banks simply used extra funds for speculative purposes.
A day before Labor Day in Brazil, on April 30, 2012, in a speech broadcast on every open TV channel, Rousseff added her voice to the call for private banks to reduce rates. “It is unacceptable that Brazil,” she said, “which has one of the most solid and profitable financial systems, continues with one of the highest interest rates in the world.”51
Her government exerted muscle where alliances were strongest—over public banks—to decrease rates in an effort to evoke a similar response from private banks.52 Public banks such as Bank of Brazil and Federal Savings Bank complied. The largest regional state-owned banks did also, mainly in the states governed by the Workers’ Party.
The Brazilian government and BCB’s battle with the private financial system over providing easier credit to the population echoed the situation in the United States, where zero-cost money had not induced private banks to extend parallel largesse. Rousseff chastised the “perverse logic” of private banks: “The Selic rate is low, inflation remains stable, but the rates on overdrafts and credit cards are not coming down.”
She praised public banks for the concern they showed for Brazil’s people. “Federal Savings Bank and Bank of Brazil chose the path of good example and healthy market competition, proving that it is possible to lower the interest charged on loans to their customers, cards, overdraft including payroll loans.” She urged consumers to support the companies offering “better conditions,” to press private banks to change their business strategy. She was digging her own political grave.
In Brazil, the three main state-owned banks were very important. They represented three of the top five banks in the country.53 The Bank of Brazil is the biggest Brazilian bank, strong because of its presence in small cities and the influence of its public employees. Other federal banks in the top five are the Brazilian Development and Social Bank, a main source of investment funding, and the Federal Savings Bank, the most important actor
in housing loans.
In Brazil’s private sector, there are two main banks, Itaú Unibanco Bank and Bradesco Bank. The first resulted from a merger that occurred between 2008 and 2010 that was approved by Meirelles. Itaú Unibanco kept its distance from the Workers’ Party government and supported Marina Silva during the 2014 election. Bradesco Bank was the closest private bank to Rousseff’s government because of its business presence in low-income classes and Joaquim Levy’s participation. Levy had been secretary of Treasury between 2003 and 2006 in Lula’s government.
On May 30, 2012, the BCB cut rates by another half point to a record low of 8.5 percent.54 The vote, led by Tombini, reflected the assumption that inflation risk was “limited” and global “fragility” was having a “disinflationary” impact in Brazil.
Private banks eventually relented. They had waited to see whether public banks would compete with them, or just threaten to, and were sufficiently afraid of losing business to somewhat alter their ways. On December 17, 2012, Febraban president Portugal announced, “We have a responsibility to improve the efficiency of banks and the quality of our services and continue to reduce costs.”55
Meanwhile, Mantega intensified his fight to curb foreign speculators. On October 13, 2012, he chastised the IMF’s support of free-flowing capital without accounting for its sources. His views echoed those of executive directors from Argentina and India. He said, “We reaffirm the need for a more balanced approach within the IMF on how to limit excessive short-term capital flows.”56 No one was listening.
