by Nomi Prins
The United States was alarmed. Latin America has been the “backyard” of the United States since the Monroe Doctrine. The American government did not relish the prospect of seeing the continent’s resources funneled to Asia. Because Rousseff’s government was open to doing all sorts of deals with China, the United States would side with her opposition, albeit quietly at first—through the National Security Agency levying spying allegations against Rousseff and other foreign leaders.
China’s worry was that its stake and future with Brazil could be imperiled without Rousseff. A new government could backtrack or nullify existing arrangements, meaning a loss of jobs but a gain in favor with the United States. Certain banks and businesses wanted Rousseff out for precisely the latter reason.
Rousseff’s quandaries paved an avenue back to tighter US alliance and neoliberal policies, such as privatization, the lifting of capital controls that had limited certain hot money flows, and development projects that extracted profits rather than fostered collaboration for mutual benefit.
QE PUSHED US SPECULATORS INTO BRAZIL
Conditions were getting uglier. On March 4, 2016, federal police stormed Lula’s home to take him in for questioning. Three investigations about Lula’s connections with companies prosecuted in Operation Car Wash (OAS and Odebrecht) officially started on March 17, 2014, but became more prominent over the years.120 In Portuguese, Operação Lava Jato, or car wash, meant doing a thorough cleaning of Brazilian politics, a joint operation of the judiciary, prosecutors, and federal police, at the national level, against corruption in all spheres of government.
In a defensive move to protect her former mentor, Rousseff appointed Lula as her chief of staff on March 16, 2016.121 According to the Brazilian constitution, ministers of state can be judged only by the supreme court. And Operation Car Wash was known to move slowly in the upper court.
It was a risky bet that was nearly blocked by Gilmar Mendes, a Justice official who had lunched with Serra—Rousseff’s opponent in the 2010 election yet also one of the top officials investigated in the Car Wash operation—hours before deciding the case. Yet, all the drama drove the real and markets higher. In investors’ minds, an end to Rousseff’s reign and her leftist agenda was a preferable alternative to installing her opposition party’s own equally scandal-plagued leader Michel Temer, a man tarred by Car Wash investigations for allegedly taking bribes and around whom bribery scandals in connection with JBS would continue to swirl through his presidency later.122
Every time it looked like curtains for Rousseff, the stock market rallied and foreign flows increased, just as they had during the height of the money-conjuring period. Two kinds of capital streamed in to the country: money betting on a quick turnaround and money sticking around for the long haul.
In April 2016, at his office in Brasília, Joao Barroso, senior adviser at Brazil’s central bank (BCB), considered the effect of capital inflows on Brazil as connected to the Fed’s artisanal money policies. According to his original analysis, over 54 percent of capital inflows from the United States to Brazil were caused directly by QE. Most of that capital flowed into Brazil’s bond market, because rates there were so much higher than in the rest of Latin America.123
Barroso also estimated that up to 65 percent of total US portfolio flows to major Latin American countries were directly caused by the Fed’s QE, isolating out all other factors. But, as he noted, “though these flows are small relative to the Fed’s $4.5 trillion balance sheet, they are considerably large relative to the recipient economies.”124
Throughout Latin America, US capital had coursed more into equity markets than into bonds. Speculative capital, funded near zero thanks to the Fed, craved higher returns. When Brazil showed less political and economic risk, the capital stuck around. As in the United States, investors weren’t interested in long-term infrastructure projects but in short-term returns.
But in late 2015 and early 2016, the effects of political problems began to overwhelm those of Fed-stimulated cheap-money flows and masked the extra problem of leverage, or taking on too much debt during the good times without considering the consequences of unwinding it. More foreign debt saddled Brazil’s corporations, which, as noted, the government subsidized by borrowing at 14.25 percent and lending to them at 2 percent—an unsustainable gap with which to run a country. But that was the lot that Brazil faced, given its difficulties manufacturing cheap liquidity compared to the developed countries that lent its companies money.
And that’s why Barroso considered coordinating global and local monetary policy a difficult task. Beyond the big four central banks (of the US, Europe, Japan, and China), he said, “It’s a game theory problem—everybody does their best for their country individually yet must balance the gains of coordination.” Partly for this reason, Brazil turned to new alliances to augment its economic fortunes and secure its future. Yet, excess coordination pressures, when they don’t help local economies, create major fractures.
The effect of the Fed’s QE on Brazil was also related to proximity and good old-fashioned opportunism. The United States drove more capital flow globally, but that capital could retract on currency devaluation compared to the longer-term investment capital coming from China.
Brazil’s secretary of international affairs Luis Balduino and Erivaldo Alfredo Gomes, undersecretary of Economic and Financial Institutions and International Cooperation at the Ministry of Finance, key figures in the Rousseff government, worked on Brazil’s relationships with the New Development Bank (NDB; the new name of the BRICS bank established on July 15, 2014).
According to Balduino, the NDB sought to be viewed as a “serious” player in the development space, which, since the Bretton Woods agreement after World War II, had been dominated by the US and European World Bank and IMF. The NDB would “contribute to the $1 trillion financing gap that the G20 said needs to be filled,” he stated. In the new power wars, the goal of fresh alliances and institutions like the NDB was to fund environmentally sustainable projects, which, because they were not based on old energy or reliant on oil and fossil fuels, extended collaborations beyond the old paradigm of the United States dollar and petrodollar. The shift that the mere existence of the NDB represented was historic.
In April 2016, in São Paulo, former finance minister Luiz Bresser-Pereira, who had helped design Brady bonds during the Latin American debt crisis of the 1980s, discussed his theory of “New Developmentalism.” The theory states that when emerging countries rely more on local capital flows than on foreign speculation, they are more stable economically.125
According to Bresser, imperialism still existed. The US system impeded stability and autonomy in developing countries. The reality, he said, is that “countries like Brazil don’t really need foreign money or finance.” Instead, they must develop more domestic finance and investment opportunities, which would also alleviate currency crises and wars.
He considered economies to be nationalistic: the world is still divided into nation-states that compete more than cooperate, which threatens social progress in general. Rather than being spent on people, cheap money constantly seeks to expand itself. The cheaper the money, Bresser argued, the more it can be used to help people. Yet, in practice, that didn’t occur, especially in the developed world. Instead, fabricated money was used as a weapon in financial warfare. It altered domestic and international power structures by furnishing capital to the G7 nations and their banks so that they could speculate globally, especially in developing countries, in markets rather than in direct economic investment that benefited populations.
In the spring of 2016, beyond the “reality TV” aspect of the politics, as former president Lula called them in his interview with Glenn Greenwald of the Intercept,126 something larger was at stake: a power struggle between the elites of the West and China.
TEMER’S “COUP”
Despite national protests and various hair-raising events—such as when the interim president of the House of Representatives,
Waldir Maranhão, took over in the absence of Eduardo Cunha and tried to annul the impeachment process, which by that time was already in the senate127—impeachment of Rousseff barreled ahead. A Senate vote on May 12, 2016, concluded with her suspension and a decision to move toward impeachment.128 Rousseff would fight the accusations of budgetary crimes, but it wasn’t just Congress she was battling, it was the entire money-conjuring regime. They wanted her out.
Upon taking over as interim leader on May 13, 2016, former vice president Temer was quick to implement austerity. He vowed to cut government spending and audit social welfare programs for the poor to kick-start Brazil’s economy.129 Rousseff’s old rival Serra became minister of foreign relations in the Temer government (serving in that position through April 2017), and he became responsible for global trade, too. In Brazil, unlike in the United States, the foreign minister has a dual responsibility for both diplomacy and foreign trade.
THE RETURN OF MEIRELLES
The harshest austerity measures were unveiled by Temer’s newly appointed finance minister, none other than former BCB head Henrique Meirelles.
That decision made, speculation mounted over who from the two big private banks would win the central bank helm.130 On May 17, 2016, Meirelles nominated Itaú Unibanco Holding’s chief economist Ilan Goldfajn to head Brazil’s central bank.131 Born in Israel, Goldfajn had many US and international ties. He had received his undergraduate and master’s degrees in Brazil and earned his PhD in economics from the Massachusetts Institute of Technology in the United States. He had worked as an economist at the IMF and as an assistant professor at Brandeis University in New York.132 He was a consultant for international entities (such as the World Bank, the IMF, and the United Nations), the Brazilian government, and the private sector.
Less than a month after assembling an interim cabinet, three of Temer’s government ministers—the minister of planning, minister of transparency, and minister of tourism Henrique Alves—were fired. They were stained by allegations from Operation Car Wash.133
Temer, to the delight of foreign banks, spoke of privatizing public companies in the communication, postal services, airports, and smaller banks sectors. He considered removing Petrobras’s exclusivity over pre-salt, which had benefited Chinese companies, and handing it over to other foreign oil companies—American and European ones.134
That summer, the 2016 Olympics brought further desperation to the people of Brazil. Temer signed an emergency loan to the State of Rio de Janeiro to help finance its infrastructure—in return for the state selling off its public water supply and sanitation company.135 When the games opened in August, Temer was so despised he did not show his face at the ceremonies. Instead, he appeared on a big screen to a loud chorus of boos, with people watching worldwide.136
On August 17, 2016, Brazil’s unemployment rate hit a four-year high of 13.3 percent from 6.5 percent at the end of 2014.137 Meirelles responded by calling for austerity measures and pension reforms.138 It was an unpopular move that would constrict an already anemic economy, yet it pushed the stock market up further. Within the new government, there was also disagreement over the real. Interim foreign minister Jose Serra warned against excessive appreciation, whereas Meirelles, true to neoliberal form, signaled less currency intervention to enable the real to float more freely.139
As head of the BCB, one of Meirelles’s former aims had been to obtain more autonomy for the entity. Temer’s interim government began constructing a constitutional amendment to underscore that very autonomy and give the BCB latitude to deploy any means necessary to meet its objectives, balancing financial stability with inflation targets.
“We call it operational autonomy,” incoming central bank chief Ilan Goldfajn said. Goldfajn’s former employer, Itaú Bank, had supported the bill since 2014. The spin was that an amendment would elevate international perception that the BCB operated independently of politics.
Meirelles’s moves demonstrated a perfect domestic power circle—before Lula, he ran a major global division of FleetBoston, then he was head of the BCB, then he returned to the private sector, and now he was the main arbiter of monetary and fiscal policy in Brazil. All of these positions rested on his ties to the United States, including his JBS position, because Joesley Batista wanted to increase his business in the United States.140 Meirelles left JBS as soon as he was nominated for the minister of finance position, moving directly from his JBS office into the Planalto Palace.
Goldman Sachs economist Alberto Ramos said the government’s new “dream team” would “bring to the Temer administration a team of respected, well trained technocrats with very rich and valuable experience in both the private and public sectors.”141
Under a photo of Meirelles depicted as a god bathed in white light flying with arms stretched skyward above the population, popular economic website Arena do Dinheiro (Money Arena) ran a piece called “Meet the Man Who Will Save the Economy of Brazil.”142 Brazil “is free to resume growth through liberalism, economic orthodoxy, confidence and transparency with the population with entrepreneurs and investors [with] friend of the market, Meirelles.”
El País dubbed him “the favorite of the financial market crisis for Brazil,” a man who “rocks the husky heart of the money men.” Bloomberg called Meirelles “one of Brazil’s most accomplished financial officials.” “While lacking political charisma,” Bloomberg noted, “the tall, balding and somber Meirelles, 70, is admired as well as ambitious and could position himself for a run at the presidency.”143
On August 31, 2016, Rousseff’s fate was sealed. She was officially impeached by the Senate in a 61-20 vote and lost her presidency.144 Though it was the day of the final vote of the impeachment that suspended her from office, she had retained certain political rights. Now, she no longer had any power.145
And it was Michel Temer, not her, who boarded a plane to China, the country Rousseff had forged new alliances with, to attend his first G20 meeting. Those alliances would be caught in another money-conjuring vortex as global power battles between West and East continued to pivot around Brazil.
It had taken Meirelles only five years since his BCB ousting to achieve this victory over the two key elements of financial power in Brazil. He was again the country’s chief artisan of money and was even in line to become Brazil’s new president, a trifecta fait accompli. Brazil was again up for grabs with respect to alliances with either the United States or China.
The corruption scandals swirling around Temer’s cabinet didn’t stop, nor did they curb Meirelles’s influence over economic and monetary policy. Even Speaker of the House of Representatives Eduardo Cunha (the bandleader of Rousseff’s impeachment) was arrested on corruption charges in October 2016.146
As president, Temer made good on his promises of reform and austerity. On December 23, 2016, he levied what he dubbed “a great Christmas gift”: a reform package that, among other things, increased the number of work hours in a day from eight to twelve and established a minimum retirement age of sixty-five regardless of the number of years worked. Meirelles said the government would not negotiate changes to its proposed minimum age of retirement of sixty-five years.147 “In principle we don’t have a plan B,” he said.148
MEIRELLES THE HAWK BECOMES THE DOVE
In February 2017, all austerity measures aside, S&P maintained Brazil’s junk status and negative outlook. (It had downgraded Brazil’s long-term foreign and local currency sovereign rates to junk in September 2015 and February 2016.) The agency forecast low growth for the upcoming years and government debt rising toward 67 percent of GDP by 2019.149 Meirelles downplayed these predictions, citing new structural reforms on the horizon. The markets responded enthusiastically to his statements and ignored economic concerns.
Meanwhile, the domestic scene became increasingly chaotic. In Espirito Santo, riots broke out while the police were not getting paid. Meirelles had directed fiscal policy that manifested as blood in the streets. In Rio Grande do Sul, under the government o
f José Ivo Sartori, ally of Michel Temer, and under Meirelles’s guidelines, public research agencies and television stations were extinguished. Government employee wages were frozen, and the unemployment rate rose.
Yet Meirelles, with the confidence of a victor counting his spoils, declared the recession over multiple times.150 It didn’t matter that every major institute of economic research, including FGV (Fundação Getulio Vargas) and IPEA (Institute of Applied Economic Research), said the opposite.151 On February 22, 2017, the BCB cut the SELIC rate by 75 basis points to 12.25 percent, the second cut in a row. With the official pronouncement of growth, Meirelles no longer needed to be a hawk. Nor did the BCB: “The reduction of interest rates in Brazil, which are among the highest in the world for a major economy, are seen as essential if Latin America’s largest country is to recover from its worst recession in over a century,” it noted.152
Temer was turning Brazil into a financial capital paradise, complete with extensive neoliberal fiscal policy and a twenty-year public spending cap proposal.153 Meanwhile, Meirelles stood by his side. So did the central bank, set to enact the same policies that had led to such a rift between the elite beneficiaries of conjured-money policy and the population that suffered from it.
In the years since the US financial crisis, Brazil has gone from an internationally recognized regional power, respected for the strength of its economy, to a politically destabilized country with a weakened economy.
Responsibility for that decline was connected to multiparty economic elites and political hits and errors, as represented by Lula, Rousseff, and Temer. There was one common person who had worked with each of them: Henrique Meirelles, Brazil’s conjurer of money. And as he sat in the government, his appointee in the BCB went about adopting the US Fed’s strategy for economic stimulus, rendering money cheap. By May 31, 2017, the SELIC had been cut four times, from 13.75 percent to 10.25 percent, in contrast to Meirelles’s former hawkishness.
