by Nomi Prins
On May 19, finance minister Levy supported José Serra’s Law Project about private concessions in the pre-salt area, which was discovered off Brazil’s coast in 2006 and had the capacity to produce thousands of barrels of oil a day and which had been a Petrobras monopoly since 2010. The project removed Petrobras monopoly obligations, which theoretically would allow the influx of foreign companies to gain access to what would have been Brazilian-controlled oil supplies.87 It was argued that Petrobras’s costs would be reduced and its revenues would increase with the dispensation of the pre-salt exploration monopoly. Levy’s action was meant to pressure Petrobras and support Serra’s initiative.
Serra had lost the presidential election to Rousseff in 2010. Now her finance minister and former opponent were locking arms. If Serra’s Law Project was approved, it presented an opportunity for international financial agents to acquire parts of Petrobras again. Given the ties among US banks, financial markets, and US big oil companies, that represented a great prospect. (On February 24, 2016, the Brazilian senate approved Serra’s project through an inside deal over the protests of Workers’ Party senators.)
THE UNITED STATES–CHINA TRADE WARS
China and Latin America grew closer during the twenty-first century, particularly during the period of cheap money initiated by the US financial crisis. Trade between the two regions increased twenty-five-fold, from barely $10 billion in 2000 to $270 billion in 2012.88 In 2014, China assumed the position of Brazil’s top trading partner, followed by the United States and Argentina.
In 2015, despite the slowing Chinese economy, external funding from state-run China Development Bank (CDB) and the Export-Import Bank of China hit a near-record $29 billion—triple the 2014 amount and more than the 2015 funding from the World Bank and Inter-American Development Bank combined.
A total of $35 billion of multilateral financing platforms reached Latin America, $20 billion of which came from the China–Latin America Industrial Investment Fund, $10 billion from the CDB for Latin American infrastructure, and $5 billion from the China–Latin America Cooperation Fund. About 95 percent of the loans from Chinese government banks to Latin America went to Argentina, Brazil, Ecuador, and Venezuela. US banks were lending corporations cheap money, but the Chinese were settling in for the long haul.
On June 11, 2015, during a meeting in Brussels with Alexis Tsipras, the prime minister of Greece, Rousseff tried to soften the blow of her new austerity policies, noting that austerity in Brazil was not like that in Greece, because of Brazil’s $370 billion in reserves. “We make an adjustment, but we do not have a structural imbalance,” she explained. “We have a financial system without any bubble.”89 Brazilians are excused for laughing out loud at that statement. The bubble was caused by a surge of outside capital dictating internal policies. It would not pop without causing pain to its population. In the meantime, as a contingency of the federal budget, public expenses were cut, social programs were reduced, infrastructure programs were interrupted, and airports and ports were given the most minor of concessions.
According to Rousseff, the high inflation was “atypical,” the result of currency adjustments, drought, and rising US interest rates. (Though the Fed had not raised rates yet, Brazil’s markets were reacting to the mere threat of higher US rates.)
Finance Minister Levy remained focused on economic and budgetary policy. A few weeks later, in an interview with El País regarding inflation and his decision to cut spending more, Levy said, “Market prices are behaving a little better. To the extent that the central bank was vigilant, this increase does not become a process.”90
He was inferring that Brazil was not dealing with an inflationary process but a “moment” that had resulted from a combination of administered price “readjust” and political crisis. He was technically right, but his argument rendered the act of raising rates to fight inflation unnecessary. In his mind, the dust would clear, inflation would drop, Brazilians would embrace spending cuts, and scandals would cease. Or, Brazil would stop being Brazil.
This wasn’t the first time that Brazil’s economy witnessed deep recession coupled with steep inflation, but it was the first time that Brazil reacted so extremely to external artisanal money policies.
On July 9, 2015, the IMF (which had forecast a 0.3 percent expansion that January) predicted Brazil’s economy would shrink by 1.5 percent in 2015 as global demand for commodities, particularly from China, waned.91 Rousseff pressed for more spending cuts and tax hikes, echoing Europe’s approach to dealing with Southern Europe, a recipe destined to elevate hardship for Brazilians. Brazil was experiencing its worst unemployment since 2010 (6.9 percent),92 the largest twelve-month accumulated inflation rate since 2003 (8.89 percent),93 and the highest consumer default rate growth since 2012 (16.4 percent). In mid-2015, Brazil’s gross debt-to-GDP rose to 65 percent from 51 percent in late 2011.
Rousseff attempted more damage control against growing criticism of her austerity programs. In a September 7 Independence Day speech broadcast over social media platforms, including her Facebook page, she admitted the government had made mistakes, noting, “Difficulties and challenges were caused by a long period during which the government understood it should spend whatever it took to secure employment and worker income by continuing investments and social programs.”94 She added, “Now we have to reassess all of these measures and reduce those that must be reduced.”
A week later, the government announced more budget cuts and new taxes.95 Proposed tax changes included a tax on checks, the abolition of tax benefits for exported manufactured goods, and adjustments on equity interest. Citizens would pay the price for government corruption and mismanagement. Payments of benefits such as scholarships in Brazil and abroad and transfers to universities and federal institutions were delayed.
In September 2015, Brazil’s unemployment rate shot to 7.5 percent from 4.3 percent in December 2014, the lowest measured unemployment rate in Brazilian history.
S&P’s rating downgrade of Brazil on September 5 shined light on the unpopular austerity measures.96 For Rousseff, the combination of alleged corruption while she chaired Petrobras and the economic recession crushed her popularity to a record low and increased calls for her impeachment. Levy had entered office on a promise to maintain Brazil’s investment-grade rating. Rousseff’s support for his austerity plans were spun as a way to maintain the investment grade, but they had not achieved that goal.
Brazil’s real was the worst-performing EM currency in 2015, dropping by 30 percent. Brazil’s Ibovespa stock index fell by 35 percent in dollar terms, exhibiting the fourth-worst performance of ninety-three global benchmarks tracked by Bloomberg.
Brazil officially entered recession in Q2.15, with GDP falling by 2.6 percent. The Petrobras scandal and investigations into inappropriate connections between industrial CEOs and the government, plummeting commodities prices, and a general EM sell-off by hot money speculators only exacerbated matters.
Tombini pursued a highly contractionary monetary policy, while other central banks maintained zero or near zero interest rates, to contain inflation after Rousseff’s reelection. Because inflation didn’t come from real excessive demand, though, the policy only deepened the unemployment problem without making a dent in the inflation caused by massive real devaluation and the adjustment of administered prices.97
Rate hikes had been a way to demonstrate the BCB’s autonomy (and rebuild its credibility with private speculators seeking returns) after Rousseff’s pressure to reduce rates during her first term. But they had a harsh, unanticipated domestic effect.
Other Latin American central banks were adopting cheap-money policies to encourage growth in the style of true currency wars and Fed-led policies. In Chile, for example, currency depreciation since 2013, despite above-target inflation, was intentional.98 Brazil went in the opposite direction of neighbors like Bolivia and Paraguay. Tombini stood in contrast to his Latin American neighbors and the rest of the developed world’s major countri
es.
Compared to the other BRICS nations, Brazil fared worse before and after the US financial crisis. Its average GDP growth between 2002 and 2009 was 3.5 percent, and between 2011 and 2014, it was 2.2 percent.99 In comparison, South Africa’s was 3.3 percent and 2.2 percent, Russia’s was 6.6 percent and 1.5 percent, China’s was 10.9 percent and 8 percent, and India’s was 6.9 percent and 5.5 percent, respectively. Regionally, only Mexico fared worse, with 1.8 percent and 2.5 percent levels. Brazil’s unemployment rate, which had fallen below 5 percent in 2014, rose to 7.5 percent by November 2015. Wages that had once risen alongside inflation were falling.
Corporate debt issuance in dollars increased as the real sank. Intercompany loans had tripled from $67 billion to $206 billion between Q1 2009 and Q1 2015. Plus, outstanding Brazilian offshore dollar loans tripled from $34 billion to $107 billion.100 For households, debt as a portion of income had also risen, making it harder for people to pay for new items or save for the future.
The BCB was stuck in a domestic conundrum. It couldn’t cut rates to stimulate growth without stoking more inflation and real devaluation, yet high rates caused more inflation, defaults, and credit squeezes. Brazil’s dollar-denominated debt was more expensive to service as a result.101
So, Tombini joined the austerity game. It played well internationally if not domestically. On October 8, 2015, he addressed the International Finance Institute in Lima, Peru, saying that fiscal adjustment (spending cuts) was occurring at a slower rate than expected and that “non-economic domestic factors” had increased volatility.102 He sought to evade blame for a situation that would tank Rousseff.
Even Lula jumped into the fray to take Rousseff’s side regarding austerity. On October 29, he said, “The priority zero—if we want to start to govern this country is to create conditions to approve the measures that Dilma sent to the National Congress so that she can definitely finish the fiscal adjust.”103 It would be a page-turn in the government’s propaganda machine, but more surprises loomed on the horizon. On November 24, the senate leader Delcídio do Amaral was arrested for allegedly interfering in Petrobras investigations.104
In 2015, industrial production fell 8.1 percent.105 By the end of November 2015, Brazil’s inflation exceeded 10 percent for the first time in twelve years. The government froze certain discretionary spending on November 30, putting Brazil at risk of a government shutdown. The BCB had already raised borrowing costs to the highest levels in a decade, having doubled the benchmark interest rate from 7.25 percent in March 2013 to 14.25 percent by late 2015. That made no dent in double-digit inflation.
On December 1, 2015, Goldman Sachs warned of “outright depression” in Brazil following a 1.7 percent contraction during the second quarter of 2015.106
Calls for President Rousseff’s resignation intensified as the Brazilian economy cratered. Her opponents accused her of using public bank funds to fudge the budget deficit during her second election year, a practice known as pedaladas fiscais. She and scores of Brazilians considered it part of a mounting coup or golpe.
House of Representatives president Eduardo Cunha started the impeachment process against Rousseff on December 2, 2015. Six days later, Rousseff’s vice president, Michel Temer, executed a Judas move, publicizing a letter accusing Rousseff of having no confidence in him or his party.107 He complained that she made him look like a “decorative” vice president rather than an active one.
Despite the mocking in the media that eschewed, Temer would have the last laugh—or second-to-last laugh, anyway. If Rousseff was tarred with scandal, he could be tarred with the same scandal.
Christmas brought no presents to Brazil. Rousseff’s officials were jumping ship. On December 18, Levy left the government to become financial director at the World Bank (the number two spot under its president), spelling the economic end of Dilma’s government. Levy’s departure meant the government had lost control over the country’s economic, fiscal, and monetary policy.108
Just before Christmas, on December 21, Rousseff’s newly appointed minister of finance, Nelson Barbosa, a heterodox economist with a PhD from the New School in New York City, announced Petrobras didn’t need a government injection.109 He believed rising oil prices could solve its problems. The next day, Brazil’s antitrust authority, CADE, opened investigations into contract rigging associated with the twenty-one companies and fifty-nine execs already under criminal probe.
Petrobras’s problems hampered Brazil on multiple levels, beyond political scandal and the estimated $30 billion in indirect-effect GDP losses.110 Owing to funding issues and regulatory requirements associated with the investigations, Petrobras stopped payments to other Brazilian firms, sending some into bankruptcy and others to the brink. Associated sectors were imperiled, including the navy and steel and construction sectors.
Petrobras was downgraded to junk by S&P on February 18, Moody’s on February 24, and Fitch on May 11, 2016. Around the same time, Fitch downgraded seven Brazilian state companies to junk, all from the energy sector.111 The banking sector fell under investigation for a myriad of crimes. Falling revenues plus higher costs resulting from greater debt burdens caused more trouble. Pension funds were increasingly underfunded, which intensified local population and political unrest.112
HAPPY 2016 (OR NOT)
The new year of 2016 kicked off with more bad news. Brazilian Christmas retail sales were the worst since 2005.113 Rising debt, defaults, bankruptcies, jobs losses, lawsuits, and currency devaluation added to the dire picture.
The IMF concluded that Brazil wouldn’t see growth until at least 2018, marking the first time in over a century Brazil would fail to expand for that long.114 It forecast Brazil’s 2016 GDP to shrink by 3.5 percent, after having contracted by 3.8 percent in 2015. This was also the first time since 1901 that Brazil had back-to-back recessions deeper than 3 percent. The prospect pressurized the BCB’s first 2016 meeting. On one hand, financial markets expected another increase of 0.5 percent in rates (any more dovish measure would be considered a resumption of Rousseff’s power over the BCB). On the other, entrepreneurs and workers criticized the idea of an increase.
In early January 2016, Tombini repeated his culpability dodge: “This has to do with political issues,” he said,115 thus deflecting responsibility for high rates and related instability to the government, which had not yet approved full fiscal adjust. He pressed Rousseff for more fiscal adjustment. Tombini said the BCB was deploying several remedies, including a “sizeable amount of international reserves, keeping a solid financial system… providing FX hedging instruments to the economy, and tightening monetary policy.”
He did not consider depreciation in the real “a source of distress” and noted the Brazilian economy was less exposed to exchange rate risks because of its high reserve levels and the FX swap program instituted during the Fed’s “taper tantrum” threat. He alluded that the labor market was adapting to the “economic slowdown,” though “the presence of wage rigidities makes disinflation more challenging,” meaning he hoped wages would sink. He vowed the BCB would maintain current rate policy for a “sufficiently prolonged period” to reach its inflation target by the end of 2016. Tombini knew he would lose either way. So, on January 20, 2016, he kept the benchmark rate unchanged at 14.25 percent.116 A month later, on February 17, S&P further downgraded Brazil to junk status. The external fears about Brazil’s scandals were compounded by its economic descent. But Brazil had some powerful external allies, an old one and a new one, jockeying for position.
BRAZIL’S FUTURE: THE UNITED STATES OR CHINA?
Beyond the political ground wars whipsawing Brazilians lay a critical battle between the East and the West for the soul of Brazil’s international position. The US government, by not issuing any public statement in support of Rousseff’s government, accentuated its desire to have her out. The issues were not about whether Brazil’s political or financial landscape should be rid of corruption (in the United States, similar corruption in the form of kickba
cks to politicians from the private sector was legalized in the form of campaign contributions) but of hegemony.
Geopolitical and geo-economic maneuvering reigned over monetary policy considerations. In the aftermath of the financial crisis, Lula’s and Rousseff’s governments crafted stronger ties with China relative to ties with the United States. Rousseff supported the BRICS development bank, newly formed in 2014, to stand up to US-led Western equivalents, such as the IMF and World Bank. Trade between China and Latin America shot up from $10 billion in 2000 to $270 billion in 2012. Sino-Brazilian trade leapt from $6.5 billion in 2003 to $83.3 billion in 2012.117 As of 2014, China was Brazil’s top trade partner, followed by the United States and Argentina.
In February 2016, Brazilian senators met with a Chinese delegation to discuss the proposed bilateral agreement to build the R$40 billion (US$10 billion) Bi-Oceanic Central railway. It was to be an on-land road linking one coast to the other, from the Atlantic in Brazil to the Pacific in Peru, to provide more efficient routes for key products such as iron, soybeans, oil, chickens, and lithium to be exported to China. The Chinese delegation included chairman of Hsin Chong Construction Group, Lin Zhouyan.118
The South Port and Railway East-West Integration (Bi-Oceanic railway) was set to be financed, built, and operated by the China–Latin America Industrial Fund (CLAI Fund) and China Railway No.10 Engineering Group (CREC). The investment was to be made in conjunction with the Bahia Mining Company (Bamin) and the Bahia state government; Bahia was the second-most-important state, governed by Rousseff’s Workers’ Party.119
