Election turmoil comes at bad time for Brazil Reading Lula da Silva

Financial markets in Brazil were jittery after the first round of presidential elections gave Workers’ Party candidate Luiz Inacio Lula da Silva 46% of the vote, double that of his nearest rival, Jorge Serra of the centrist Social Democrats.

The markets were responding to fears that Lula da Silva would adopt policies that were more interventionist (and, not coincidentally, more expensive) than his predecessor, Fernando Henrique Cardoso. Cardoso’s administration has been credited with Brazil’s economic renaissance of the 1990s; and, more so than most governments, it deserves the credit. In the early years of the decade, the country had an unmanageable level of public spending, and the strong fiscal medicine it needed was mainly forced down by Cardoso’s government.

The election comes at a bad time for Brazil. It recently got a US$30-billion line of credit from the International Monetary Fund to service existing debt, and international creditors were already nervous before it became apparent Lula da Silva was the front-runner in the presidential race.

A chief reason for the fears is that Lula, as the ex-union leader is known, is supported by the country’s hard left, who have talked of repudiating the country’s large public debt. But to be fearful on that score is probably jumping at a shadow; the far left has nobody else to support, and Lula does not have to reach them; to prevail he needs the centrist vote. Every country has a fringe left that supposes nations can turn their backs on their creditors without sustaining a serious loss of reputation.

A decade devoted to bringing down its large foreign debt has taken a heavy toll on government services to which many had felt entitled. Discontent over this is a wellspring of support for Lula, and many of his supporters see servicing the debt as a lower priority than bringing back some of those entitlements.

But at the same time, a Brazilian government will need friends outside its borders, willing to support its case with the International Monetary Fund, and will have to walk the tightrope between those two camps. Unfortunately, Lula’s wire act started badly when he wowed the crowd by walking backward — saying he recognized the need to cover Brazil’s debt, but that he would replace Arminio Fraga, president of the Central Bank of Brazil, a figure who has done much to reassure external lenders.

Social Democrat Serra, a former health minister under Cardoso, was Cardoso’s favourite to succeed him, but three things conspire against him: the anti-Lula vote was fragmented, Cardoso’s reforms are currently unpopular, and he has, from all accounts, a remote style that breathes “technocrat” in people’s faces.

Brazilian presidential elections operate on the French pattern, with a second-round runoff election required if voters give no candidate a majority. Serra is in tough: he has only a half-hearted endorsement from the strongest of the right-wing parties, the Liberal Front, and both the presidential candidates that were dropped off the ballot, former finance minister Ciro Gomes and Rio de Janeiro state governor Anthony Garotinho, have thrown their support to Lula.

But in the end, the fears of the financial markets may prove overblown. If Lula wins with broadly based support, he can probably pursue moderate policies with little effect on his left-wing base. Financial discipline and a concern with the long view may not win him friends in the international financial community, but it will buy a great deal of their patience.