by John Fitzpatrick

Banking may be on a par with dull subjects like accounting or economics as a career prospect for any youngster but banking in Brazil is certainly not boring. This week we have seen four banks in the middle of political rows – the National Bank for Economic and Social Development, the BNDES, Banco do Brasil, the Central Bank and Banco Santos. 

The first three are government-controlled, although private investors can buy shares in Banco do Brasil, while the last is privately-owned. The BNDES is one of the largest banks of its kind in the world and has played a key role in Brazil´s development since it was founded in 1952. Like the state-owned oil company, Petrobras, it has become almost a holy icon for the more nationalistic element, whether right-wing or left-wing, to be revered and protected at all cost. 

While some commentators have hailed the BNDES for supporting the domestic economy, others have accused it of cosseting inefficient and uncompetitive industries during the period when the Brazilian market was almost closed to foreign producers.  Things started to change under the administration of President Fernando Henrique Cardoso when the BNDES played a role in the privatization process. This process led to the sale of many publicly-owned utilities and companies, such as Telebras and the CVRD mining concern, sometimes to foreign investors, and the BNDES came under strong criticism from the old-timers. 

When President Luiz Inacio Lula da Silva came to power almost two years ago he appointed one of the old guard, an economist called Carlos Lessa, to take charge of the BNDES. Lessa immediately made it clear that, under him, the BNDES would be a different institution. It would help ailing Brazilian companies, discriminate against foreign companies which would have to pay higher interest rates for loans, and provide loans to companies in neighboring countries, such as Argentina and Venezuela, to promote regional solidarity. At the same time, Lessa mounted an attack on the government´s economic policies and was scathing about the Central Bank´s monetary policy committee, the Copom, which sets interest rates.

Lula tolerated these attacks until this week when he summarily fired Lessa and replaced him with the planning minister, Guido Mantega. The sacking led to an extraordinary scene in Rio de Janeiro in which about 200 people demonstrated in support of Lessa outside the BNDES headquarters. Few fired bank managers in the world could ever have imagined they were so popular. In typical arrogant style, Lessa used the opportunity to make absurd and unhelpful comments about the current monetary policy, which he claimed was as doing nothing to help the unemployed. Presumably, he did not mean himself because he will return to his position as a professor in economics.

Lessa had been asking to be dismissed but by not doing so much earlier, Lula allowed a sore which should have been lanced to fester. However, thankfully he finally acted. We must now hope the new head of the BNDES will lead a more constructive institution, which will concentrate on providing credit instead of attacking government policy.

Another top banker who had annoyed Lula, Cassio Casseb of Banco do Brasil, became unemployed this week. Unlike Lessa, one can feel some sympathy since Casseb was as much a victim as a villain. He reigned but did not rule during his term at Banco do Brasil, another institution which is also held in regard by elements of the left and right. Lula´s Workers Party (PT) had basically stacked the cards against Casseb by appointing its own candidates to the Board of Directors. This mean that Casseb was unable to control his subordinates. Unfortunately he had to assume responsibility for an embarrassing incidents earlier this year when BB sponsored a country and western concert to raise money for PT funds. There have been reports that from now on Lula wants professionals running BB and for the PT to keep its distance. If so, then something good will have come of this latest resignation/dismissal but it is unlikely that the PT diehards will let go of the goose that lays the golden egg as easily as that.

The Central Bank raised interest rates again these week – by 0.5% to 17.5% - and looks like doing so again in December. The reason is that the Copom is worried that inflation still poses a threat to the government´s inflationary targets. The usual comments followed this decision, with one side claiming that the Central Bank was throttling growth and the other claiming that high interest rates were a necessary evil. The decision shows that, despite economic growth, Brazil´s finances are still in a dodgy state, thanks to the huge public sector debt and the lack of any political breakthrough to bring it down to a more manageable level. The much-vaunted PPP scheme by which the private and public sector will get together to invest in improving infrastructure is still bogged down in Congress, despite hopes that it might have gone before the Senate        

last week when the PMDB and PFL made objections.

Finally to a bank that most foreign readers have probably never heard of - Banco Santos. Despite its name, it is not some traditional bank which made its money financing the coffee trade through the port of Santos over the last century. It was founded only about 20 years ago and its publicity-mad owner, Edemar Cid Ferreira, was more often seen on the social than the financial pages as a sponsor of art and historical exhibitions. He owns a huge house by the side of the sluggish, polluted river Pinheiros in São Paulo opposite the recently inaugurated headquarters of his bank.

Maybe Ferreira should have spent more time looking at his balance sheet and less at old maps and modern paintings because the Central Bank took Banco Santos under its control, alleging that there was something wrong with its finances. At first it looked as though this was not a big problem since Banco Santos is said to have had only about 700 clients, mainly medium-sized companies. However, over the last week we have seen several interesting developments. Former President Jose Sarney, who is the chairman of the Senate and a good friend of Ferreira, admitted that he had withdrawn his money from the bank before the Central Bank intervened. He did so because he had heard news and rumors that it was in difficulty. The PT also admitted that it had an account at Banco Santos, where funds for its new headquarters were deposited, but denied that it had withdrawn any.

A week after intervening, the Central Bank also announced that it was lowering the compulsory deposits which banks of a similar size to Banco Santos have to apply with it because there had been a run on many of these institutions. Worried investors have started to transfer their accounts to the bigger banks where, presumably, they are safer. There are wheels within wheels here and no doubt there will be more interesting revelations as this affair unwinds. 

As to the press, it is now full of stories about how the “market” had known for months about the Central Bank´s concern. No doubt people who had accounts with Banco Santos or funds administered by its asset management arm are wondering why, instead of showing photos of Ferreira posing at cocktail parties, these papers were not publishing articles  warning them about the risks facing them. Many of them were also making lots of money from the lavish advertising campaign Banco Santos had embarked on recently.

November 11, 2004

(c) John Fitzpatrick 2004