The week of September 15 to 19, 2008 will never be forgotten on the financial markets. It started with the collapse of Lehman Brothers followed at lighting speed by the sale of Merrill Lynch, the rescue of the AIG group, and ended with the US Treasury announcing a rescue package to try and get the “toxic” liabilities off banks´ balance sheets. This dramatic announcement combined with actions by Central Banks all over the world to enhance liquidity helped stock markets bounce back from the depths they had plunged into. To date Brazil has escaped the worse of the fallout from the US sub-prime mortgage crisis but Brazilians watched these events with the fear of those who know they could fall victim to a contagious disease at any moment. The most visible effect was seen on the São Paulo stock market, the Bovespa, which lost 7.59% on Monday, rose by 1.68% on Tuesday, fell by 6.74% on Wednesday, rose by 5% on Thursday and jumped by 9.57% on Friday, the highest one-day rise in almost 10 years. The Central Bank also entered the market and sold US$ 500 million in an operation to bring some liquidity to the market and help businesses which were unable to raise funds abroad. To give a Brazilian perspective, Brazil Political and Business Comment presents the views of leading politicians, ministers, financiers, businessmen and economists. We start with President Luiz Inacio Lula da Silva who spent much of the week trying to distance Brazil from events abroad and going so far as to say: “The press keeps asking me about the American crisis. I say: ask Bush. It´s his crisis, not mine.”

President Luiz Inacio Lula da Silva: “We no longer depend on one or two countries. Nor do we have the International Monetary Fund interfering in what we do any more. We also have US$ 207 billion in reserves to prevent our country being the victim of speculation. In the past, Brazil had a lot to do with Europe and the United States but today we have more to do with South America, Latin America, Africa, Asia and the Middle East.” (19/9) 

“Those (banks) spent their time interfering in Brazil, telling us what to do, measuring the country risk, telling investors whether Brazil was reliable or not. It was if they were super intelligent and we were the poor little things. It´s sad to see these know-alls going broke and filing for bankruptcy. They decided that capital should go round the world in recent years, not to create jobs and wealth but as financial speculation with the casino of the international system determining the logic of the economy.” (18/9)

“We will raise credit to allow Petrobras to continue making investments and anticipate the extraction of the oil from the pre-salt layer to the maximum. The federal government will assume responsibility with Petrobras for obtaining credit so that its projects do not stop. We will not allow any of Petrobras´s projects to come to a halt. (18/9)

Henrique Meirelles, chairman of the Brazilian Central Bank: “Brazil has prepared itself for a more different international scenario like this. When we announced our policy in 2004 of accumulating foreign reserves, we said the Central Bank reserved the right to intervene on the markets whenever there were problems of liquidity or price distortions.” (18/9)

Guido Mantega, finance minister: “I am calm and sure that we can face up to a crisis which is longer and deeper than we had imagined. Brazil is now a different country. It is much better developed than in the past, with more solid macroeconomic fundamentals and US$ 200 billion in reserves. We should not be impressed by one of two days of tension on the market. The problem lies abroad, not in Brazil. We should not take any precipitate action as the situation in Brazil is under control.” (15/9)

Miguel Jorge, minister of development, industry and foreign trade: “This American crisis could have a secondary effect on Brazilian exports. However, this reduction in exports could be offset by the rise in the dollar as it was at one point by the increase in commodity prices.. I expect exports to come to at least US$200 billion. We will have a very large surplus this year.” (18/9)

José Sergio Gabrielli, chairman of Petrobras: ”Obviously nobody is crazy enough to raise resources at the moment but our projects (for the medium term) are good and the market is always ready to finance good projects.. The fundamentals are the tightness between supply and demand which is the main reasons for the high prices we have seen recently. However, speculation has played a part as the fundamentals cannot explain how the price of oil has gone from US$147 to US$91over the last three months.” (18/9)

Arminio Fraga, former chairman of the Brazilian Central Bank: “It is obvious that the idea of decoupling was never more than a dream some people had. On the other hand, the old idea that if someone sneezed in New York we would catch pneumonia here should no longer be the case. The recent sign that the government would increase the primary surplus slightly was good.. As for the stock market, Brazil has benefited for a long time as the market favorite. Now, during this phase of de-leveraging and redemptions, the country is paying some of the price. At the same time, the Brazilian stock market has a very high weighting in commodities, the prices of which are falling.” (15/9)  

Alexandre Schwartsmann, former director of the Brazilian Central Bank:”.. The Central Bank is actually lending dollars to the market in response to the movement that took place on Thursday in the FX markets. Indeed, the scant liquidity of hard currency - chiefly for trade financing, as banks are hoarding dollars amid the international crisis - led to an unusual situation: the spot rate traded above the future rate for the greater part of the day, meaning that dollar rates in Brazil were actually negative. We expect the Central Bank action to mitigate (if not eliminate) this distortion. Moreover, as the auction involves the simultaneous sale and purchase of hard currency, the direct impact of the auction on the exchange rate is likely to be nil, although it seems safe to assume that, as markets revert to normality, the BRL should regain some of the terrain lost on Thursday. We would expect the Central Bank to make use of the instrument while local FX markets remain affected by the international turmoil, in practice playing for a while the role usually played by foreign banks. In all, we believe it is a good decision and should help push markets back to their usual self. (18/9)

José Julio Senna, former director of the Brazilian Central Bank: “Brazil will certainly feel the world experience in overcoming this crisis. The risk perception has risen which will make credit more expensive. As a result, the country should grow below its potential for some time at around 3%.” (20/9)

Fabio Barbosa, chairman of the Brazilian Banking Federation: “Brazil has experienced other lesser crises which have brought the country to its knees. However, it has improved and has created a three-point defense made up of a floating exchange rate, fiscal responsibility and a firm policy to combat inflation which the government has maintained, even in the most unfavorable moments. It is thanks to this tripod that the international crisis is having little effect on Brazil.” (21/9)

Roberto Macedo, economist: “Brazil is already facing problems in raising and renewing foreign loans, including having to pay more to do so. There is nothing to worry about so far but this could bring complications e.g. in relation to the government´s grandiose plants for the pre-salt exploitation if the price of oil falls a lot and makes it unviable to extract at a high cost and discourage loans for this purpose.” (18/9)

Nathan Blanche, partner in Tendencias Consultaria: ”Brazil is being affected by the turbulence we are seeing on the international market. We cannot say we are protected from it. In crises of this nature, and Brazil has had plenty of experience of crises, the foreign currency reserves can simply evaporate if they are badly handled. We would like to believe  that President Lula will once again use his good sense and give the Central Bank the independence it needs to operate. The president knows that his main electoral link and popularity depend on low inflation indices which preserve the income of most of the electorate.” (20/9)

© Brazil Political and Business Comment 2008