Brazil's Franco Returns to Limelight With Debt Default: Bloomberg Profile
Brazil's Franco Returns to Limelight With Debt Default: Profile
Thu, 7 Jan 1999, 4:57pm EDT
Belo Horizonte, Brazil, Jan. 7 (Bloomberg) -- Itamar Franco
has never forgiven Brazilian President Fernando Henrique Cardoso
for taking all the glory for ending Brazil's hyper-inflation.
Now, the former president and Cardoso ally is exacting some
revenge.
''He has long-standing rancor against Cardoso for having
stolen his thunder,'' said Walter Stoeppelwerth a government
finance analyst with Robert Fleming Securities in Sao Paulo.
''Some believe Franco will be the most powerful opposition
politician in the next four years, and I think Cardoso is a
little afraid of him.''
Franco, 68, the silver-haired governor of Minas Gerais sent
stocks and bonds plummeting today by freezing payments for 90
days on $15 billion of debt payments to Cardoso's federal
government. The state may also not be able to pay off a $100
million Eurobond maturing next month.
While his move is clearly economic -- Minas Gerais is almost
broke -- there is a strong element of politics and history in
Franco's tactics that thwart Cardoso's vital deficit-cutting
efforts.
Trading Places
Four years ago when the anti-inflation ''Real Plan'' began,
the political rivals' power was reversed. Back then he was
president and Cardoso a mere finance minister. Cardoso spear-
headed the drive to eliminate inflation, running at 5,000 percent
a year in 1994. The plan was a resounding success, as Brazil
endured deflation last year, with consumer prices falling 1.8
percent.
Franco argues it was his idea, though Cardoso has always
received the accolades. Franco bristles at the suggestion he
tried to block the plan.
''One day history will show my participation, approving,
endorsing and supporting the Real Plan,'' he said a few years
ago.
Franco's decision to freeze payments on Minas Gerais' debts,
is fully in character, analysts said. A proud but quiet man,
Franco has staked out a long political career at all three levels
of government as a populist and defender of the little guy. He's
vowed not to cut jobs or sell state assets. More than anything,
the move may be aimed at winning some headlines and better
financing terms for his beloved state.
''I think this is more of an attempt to win leverage than a
serious threat,'' said Alexandre Barros, president of Early
Warning, a Brasilia political risk consultancy. ''I think he will
do what he has to do to get attention and raise his profile then
negotiate a better deal.''
While changing parties frequently and serving in a variety
of offices, he has remained true to a kind of paternal
nationalism that still has strong roots in Brazilian society.
Never know for his brilliance in policy, Franco is best
remembered as president for an attempt to woo a pantyless model
at Rio de Janeiro's Carnival, as his drunken justice minister
fell down the stairs of their semi-private box.
Economic policy reversals during his short term led to
suspicion that Franco never really understood what Cardoso was up
to as finance minister, and if he had, he would have opposed it.
Then Franco's economic knowledge was described as ''below
ECO 101'' said Barros. Today Barros said, ''Franco is proof
that time does not solve all problems.''
Accidental President
An almost accidental president, Franco held Brazil's top job
from 1992 to 1994. Little known outside Minas Gerais, where he
was a senator for 17 years before being picked as a running mate
by Fernando Collor de Mello in 1989, he became president when
Collor resigned while facing a Senate impeachment trial on
corruption charges.
Franco's relationship with Collor, though, was rocky from
the start. One of Franco's first acts as president was to stop a
state-asset sale program put in place by Collor.
He later backed down, but until he picked Cardoso late in
his term, the finance ministry, along with economic policy, was a
revolving door.
Always unpredictable, one of Franco's biggest personal
initiatives was a campaign to get Volkswagen AG -- which was
trying to modernize its outdated line of Brazilian cars -- to re-
introduce the Fusca, or Beetle. The car, whose construction in
Brazil had been sign of Brazilian modernity a generation earlier,
was just the kind of car Volkswagen wanted to delete from its
line.
His nationalism came to the fore when, after a grizzly
murder of street children in Rio by several policemen, he blamed
''developed nations,'' for the crime.
Asset-sale Foe
In his campaign for governor last year, he said he would try
to reverse the partial sale of the state's stake in Cia
Energetica de Minas Gerais, one of Brazil's largest utilities,
and resist firings of state workers.
Cemig's non-voting preferred shares have fallen 33 percent
since he announced his intent to review the sale of 30 percent of
the company to a group led by U.S. based AES Corp.
''Franco's agenda is clearly narrower than that of the
president,'' said Lawrence Krohn, chief economist with Donaldson
Lufkin & Jenrette in New York. ''By declaring a moratorium, he's
undermining the central government when it's still quite
vulnerable in world markets.''
Considered honest if a little bumbling -- many make light of
the fact that his first name rhymes with the Portuguese word for
slow -- the less than polished nature of his character has not
hurt him with the public.
On taking office as president he rejected image advisors,
and kept his klunky glasses and refused to trim a long and unruly
tuft of hair that became a favorite with political cartoonists.
Franco also makes much of his humble birth on a ship off the
coast of Bahia in northern Brazil, and the babe-in-arms journey
with his poor mother to Rio de Janeiro. The ship that carried
them, called the Ita, combined with the world for sea, mar, even
gave him his name: Itamar.
Unlike Cardoso, a PhD Sociologist and University professor,
Franco, speaks directly to millions of Brazilians frightened by
state-asset sales, government budget cuts and state-government
firings that have been associated with Cardoso's term. And he may
win support from other governors to freeze their state payments
to the Cardoso government.
''He touches a button with the press and knows how to get a
large segment of the Brazilian population going,'' said
Stoeppelwerth.
Franco, though, is ambitious and quick to attack a slight,
real or perceived. He is also backed by a group of loyal and
sharp political operatives who have been with him for years.
Empty Kitty
Keeping his promises, particularly not to fire state workers
will be hard. His government's tax take barely covers payroll. A
full 80 percent of government revenue goes to pay pensions and
salaries.
Many suspect he has already written off his term as governor
and is trying to use opposition to Cardoso to unite all of the
government's malcontents in a bid to regain the presidency in
2002.
Others hope he won't get that far, and that Brazil has moved
on from this populist past.
''He's a dying breed; he's being phased out,'' Krohn said
adding that the country has changed under Cardoso. ''Franco may
have described the brazil 20 years ago but not of today.''
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