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European Crisis Hitting Brazil Economy Hard
Sept. 14, 2011

Published by Minyanville

As Europe continues to suffer from a sovereign debt crisis, Brazil’s economy is being hit hard and President Dilma Rousseff has said that her country is likely to join a rescue plan. The news comes as the European Commission announced that it will soon present plans on jointly issued eurozone bonds but warned of no simple solution to the crisis.

Rousseff complained that bickering between politicians in developed nations is hampering any revival of their economies. “There is not an international solution to this problem. Since there's no possible form of solution to the euro region problem, then what we need is that that they decide and come up with a framework for a rescue,” Rousseff said.

Central Bank President Alexandre Tombini has said that Europe needs to act swiftly. Talking to local newspaper Brasil Economico, he said: “The best scenario would be quick and definitive action that re-establishes normality and shifts the debate to sustainable growth measures.”

However, word from India seems to suggest that emerging markets are similar in their own efforts in throwing together an ad hoc plan to aid Europe. “The idea has been thrown at us by the Brazilian finance minister,” R Gopalan, a senior Indian official, told the Financial Times.

The real has weakened further on the news, trading at 1.73 to the US dollar, a ten-month low. The currency has weakened in seven of the eight trading days since the Central’s Bank interest rate cut two weeks ago.

Analysis of the rate cut has come thick and fast. Last week’s news that inflation was at a six-year high is now followed by the announcement of a jump in retail sales in July. Figures for the month were up 1.4% from June and 7.1% from the previous July, causing worries that the rate cut was premature. Brazil’s middle classes are often blamed for the boom and it is their purchase of primarily home appliances and food that has caused this jump.

The interest rate cut was seen by some to be a political move and Tombini has been forced to defend it. Talking to Globo TV, he said: “The Central Bank continues to operate with autonomy.” He rejected critics who suggest otherwise, adding: “The central bank does not have any other target than inflation.”

However, John Welch, chief emerging markets strategist at Macquarie told Bloomberg that the rate cut shows only that policy makers are “betting” that inflation will slow before 2012. “I don’t see any reason for inflation dropping,” he said. “At the margin, it’s accelerating again.” Welch expects authorities to “rethink” the decision.

Corruption

“The most common hidden cost in Brazil is corruption,” writes Ricardo Geromel in Forbes this week. The comment pieces come in the wake of a spate of resignations from Rousseff’s cabinet as well as the WikiLeaks cable release of a letter sent 18 months ago by US Ambassador to Brazil Thomas Shannon to US Attorney General Eric Holder, suggesting that corruption was “widespread and persistent” in the government of popular former president Luiz Inácio Lula da Silva.

Despite its immense popularity, Lula da Silva’s government was mired in scandal, most notably the mensalão scandal of 2005 in which government officials are alleged to have made large payments to allies. The recent resignations from Rousseff’s government have done little to change public perception, especially as she herself is seen as politically weaker than her predecessor.

“Do not overlook hidden costs related to corruption, security, bureaucracy and our dysfunctional legal system,” warns Geromel.

Foreign Investment


Foreign direct investment is expected to rise nearly 50% this year to $70 billion, after hitting $48.5 billion in 2010, according to the Central Bank’s director of monetary-policy Aldo Mendes. This dwarfs the official government projection of $55 billion for this year, which the Bank insisted had not changed. In the first half of the year, to July, the country received $38.45 billion in foreign direct investment.

Many foreign investors are keen to move into emerging markets such as Brazil as traditional ones suffer from the global crisis. However, there are concerns about the country’s overheating economy that may just, finally, be showing signs of cooling.

However, the numbers may be slightly skewed as there are concerns that investors are attempting to get around equity and fixed-income asset taxes by disguising those purchases as direct investment, according to the Wall Street Journal.




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© Girish Gupta