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Strategies & Market Trends : Telebras (TBH) & Brazil -- Ignore unavailable to you. Want to Upgrade?

To: Steve Fancy who wrote (22408)	7/18/2001 10:47:47 AM
From: Steve Fancy	Read Replies (1) \| Respond to of 22640

Argentine Woes Hurt Brazil Cardoso Bid To Name Successor (This article was originally published Tuesday) July 18, 2001 By Terry Wade Of DOW JONES NEWSWIRES SAO PAULO -- Contagion from Argentina's flirtation with financial meltdown is confounding Brazilian President Fernando Henrique Cardoso's ability to make sure his party wins the 2002 presidential race. For Brazil's father of fiscal stability, a quick recovery in Argentina would be the best outcome and would improve the odds that Cardoso - who's ineligible to run for a third term - can get his candidate elected. But if Argentina can't pull out of a three-year recession and create fiscal stability, it may be better for Cardoso's cause if Argentina opts for a forced debt restructuring soon, rather than drag markets through an indefinite period of uncertainty, analysts say. That way, Cardoso would have more time before the October 2002 election to try to overcome the heavy contagion that would likely follow a default. "A resolution to the Argentine crisis in the short term is very important for Cardoso's chances of having his candidate elected," said Fernando Abrucio, a political scientist at the Fundacao Getulio Vargas business school in Sao Paulo. So far, Argentina's woes have combined with Brazil's worst-ever energy crisis to weaken the real more than 20% this year and drive up inflation, forcing the central bank to hike rates four times since March. The rate hikes and decreased industrial activity stemming from the power crunch have slowed the economy. "Argentina is limiting Cardoso's ability to make decisions," said Abrucio. And with the central bank burning through cash to defend the real - $6 billion is earmarked for interventions through the end of the year - and rising interest rates on Brazil's enormous public debt eating up more government revenues, Cardoso may not find cash for pork-barrel projects - such as increased public health spending - that generate votes. Minefield Of Issues To Navigate At Home Before naming a candidate for his Social Democrats party - expected in April, about six months before the elections - Cardoso's hoping to stabilize the currency and bring more energy online, while praying economic engines in the U.S. and E.U. pick up steam. In the meantime, Cardoso's would like to see one of the four members of his party that may be candidates start outperforming a slew of potential opposition party candidates in the polls. Cardoso hopes Health Minister Jose Serra, Ceara state Governor Tasso Jereissati, Finance Minister Pedro Malan or Education Minister Paulo Renato de Souza will replace him. Cardoso faces a minefield of popularity-testing issues - many beyond his control - that provide opposition candidates with ample fodder leading up to the election. In June, the former sociologist's popularity rating plunged to 17.7%, its lowest point ever, after the government said it would ration energy by 20% to stave off blackouts. The government's current rush to build dozens of gas-fired power plants may be too little, too late, especially as Argentina's crisis deepens. "He's got the momentum going in the wrong direction," said Peter Hakim, president of the Inter-American Dialogue, a think-tank in Washington D.C. Cardoso may need to make unpopular spending cuts of BRR5 billion in coming months, according to local media reports this week that the government denied, as higher borrowing costs from interest rate hikes have boosted Brazil's debt load to 52% of GDP. And more rate hikes are expected, which would further slow economic growth - already seen coming in at less than 3% this year, compared with earlier hopes of around 4.5%. Owners of many of Brazil's biggest banks, fearing the worst in Argentina, are pressuring Cardoso to enter an agreement with the International Monetary Fund after Brazil's existing accord ends in December. Renewing the deal though, Cardoso's party fears, would provide more ammunition for opposition candidates to criticize the current administration for failing to wean itself from reliance on the IMF's money and economic prescriptions. The public, suffering through higher retail prices and an emerging wave of layoffs, may be easily wooed. Pork-Barrel Spending Could Backfire Meanwhile, observers doubt fiscally-prudent Cardoso would be able to switch course and spend his party's way into office, even if the money becomes available. "I'm not convinced that any big populist spending drive right now would make a difference, in fact it may be counterproductive," said the Inter-American Dialogue's Hakim. So to get past the first round of the election - which narrows the field to two contestants if no candidate wins more than 50% of the vote - the Social Democrat candidate may need to distance himself from Cardoso by promoting energy and economic policies that differ from those of the current administration. Leftist Workers' Party candidate Luiz Inacio Lula da Silva, a three-time presidential also-ran, is expected to glide into the second round on his solid base of about a third of all votes. The rest of the votes are seen being divided up among Cardoso's candidate and three other opposition contenders - maverick Minas Gerais state Governor Itamar Franco, socialist Rio de Janeiro state Governor Anthony Garotinho, and former Finance Minister Ciro Gomes, who is casting himself as a true center-left politician and claims Cardoso has drifted too far right. -By Terry Wade, Dow Jones Newswires; 55-11-3145-1479; terry.wade@dowjones.com