| Cavallo and Malan | ||||||
The tango effect is being felt in the international bond and currency markets and in the halls of the central bank in Brasilia, but so far it has had relatively little effect on the average Brazilian.
While Argentines switch their peso deposits to dollars and move their dollar deposits out of the country, Brazilians remain perfectly happy with their currency, the real. And since both personal savings and personal credit (including mortgages) are minuscule in Brazil, the central bank’s rate increases have had very little direct effect on individuals’ finances.
So far, the tango effect has had an effect on individual Brazilians generally only when they’ve travelled abroad, and found everything much more expensive than it was six months ago. Brazil, notwithstanding its stunning coastline, continues to run a tourism deficit: maybe the recent depreciation of the real will be the thing to finally bring the tourism account into surplus.
As for the banking system, so far it has held up pretty well. In the short term, indeed, the larger the government’s fiscal deficit becomes, the easier the banks have it. They can make a healthy risk-free return simply by lending to their own country. In the longer term, of course, the government has to stop crowding out the private sector. But the banks no longer present a systemic worry, as they did in 1998.
| Fernando Cardoso | ||||||
Although both countries’ finance ministers claim to be practising fiscal austerity, the phrase means something very different in Argentina than it does in Brazil. Domingo Cavallo has implemented a zero-deficit plan that involves swingeing cuts across all parts of the budget, including public-sector salaries. Meanwhile, Pedro Malan’s budget cuts in the run-up to the 2002 elections have been tiny. Malan, of course, has the luxury of letting monetary policy and the exchange rate bear a lot of the strain, while Cavallo’s own convertibility plan has robbed him of any such freedom.
And although no-one in either government will admit it, the two major partners in the Mercosur trading bloc (the other members are Bolivia, Chile, Paraguay and Uruguay) have been drifting apart for years now, and certainly ever since Brazil devalued without consulting, or even informing, Argentina ahead of time. That devaluation gave Brazil a competitive advantage over Argentina, as well as an easy way for international investors to differentiate the two countries if and when Argentina went into crisis.
Should Argentina move into a full-scale default, shock waves would certainly be felt in Brazil, and at an opportune time for the leftist opposition. Pedro Malan, who has so far largely managed to insulate himself from the tango effect, would have to implement painful budget cuts; president Fernando Cardoso’s popularity ratings could start to fall back towards all-time lows around 13%. But a full-scale crisis is not likely, no matter how bad Argentina gets: the worst case this year is probably a further weakening of the real, negative growth, and fiscal retrenchment.
The real problems for Malan and Brazil are longer term: what happens if an Argentine crisis scares away the Spanish and US multinationals that have been overwhelmingly responsible for investment into the region? How will Brazil’s balance of payments cope if higher interest rates and a weaker currency make the sovereign’s debt servicing costs soar even further, while investors in the country start repatriating their profits? And even more important, how will Malan be able to persuade the international community that Brazil is not like Argentina at all, while still maintaining that the two countries stand back-to-back in the Mercosur trading bloc?
In any case, the ability of Cardoso and Malan to get anything done at all, and the interest of the international community in what they are doing, is shrinking by the week. As the 2002 elections approach and Cardoso becomes more of a lame duck, attention will inevitably focus not on the present government but on the politicians fighting it out to become the next president. And mollifying the markets as to future fiscal policy doesn’t generally garner a lot of votes.
Most analysts say they’re pretty sure that there will be policy continuity in Brazil, but it’s hard to keep that in mind when some leftist politician or other is banging the populist drum while leading the polls, as will inevitably be the case at some point.
