Brazil Shouldn't Count on Washington

Wall Street Journal
2009/03/23
By MARY ANASTASIA O'GRADY
If a leader's job during a crisis is to inspire confidence, then last week, on a visit to New York, Brazilian President Lula da Silva was working overtime.
Yet sprinkled between the marketing pitch to investors and the requisite socialist pledges to drive toward greater redistribution of income, Mr. da Silva also issued some subtle warnings about how difficult things might become if the U.S. further mishandles its financial leadership role.
Speaking to an investor conference sponsored by The Wall Street Journal, Mr. da Silva did his best to accentuate the positive. He noted that Brazil's debt to gross domestic-product (GDP) ratio is now 35% (a level not seen since 1978) and that "capital inflows have been going against the global tide."
More broadly, he talked of how the middle class, the domestic market and exports have all expanded under his guidance. Though the financial crises of the 1990s emanating from Mexico, Asia and Russia were all less severe than this one, Brazil is doing much better this time around, the president said.
The lunch crowd at the Plaza Hotel seemed to approve of the message, and perhaps the messenger even more. A former metal worker and union organizer, Mr. da Silva terrified investors with his fiery antimarket rhetoric in Brazil's 2002 presidential campaign. But since taking the helm in January 2003, he's earned a reputation for pragmatism.
He has become one of the world's most ardent defenders of global free trade. Once renowned for its periodic hyperinflationary bouts, Brazil now enjoys relative price stability, and Mr. da Silva, who adopted former President Fernando Henrique Cardoso's anti-inflation stance, deserves credit. Yet stability without growth doesn't get a poor country very far; that's why there's still plenty to fret about. Lula fretted out loud about some of it at a breakfast with Journal editors before the conference.
Brazil has become an export powerhouse over the past decade, and the main impediment to growth this year will be the collapse of global trade. This is showing up in falling industrial production, which contracted 12% in December. It was the largest drop in the 17 years that the government has been recording the data. Mr. da Silva says the economy will still grow this year, but a number of independent analysts forecast a contraction.
Global deleveraging is the main problem. Battered by the drop in housing prices, the American consumer has withdrawn from frenzied buying and has begun saving. This has reduced demand, and there is not much to do about it from Brazil. Mr. da Silva would be better off using his bully pulpit to push for a reform of Brazil's cumbersome tax code, which damps job growth, rather than pinning his hopes on U.S. government action to resuscitate the consumer.
But it is also true that there has been a contraction in trade financing. This is because, as bad assets have weakened the balance sheets of large global institutions and destroyed their capital bases, bankers have pulled in their horns. Citigroup, for example, was one of the leaders in trade financing in the region, and Brazil may be feeling the pinch from Citi's troubles.
Mr. da Silva sees a parallel to Japan in the 1990s, with its zombie banks unable to restore lending. The world, he warned, cannot afford to have the same thing happen in the U.S. because the U.S. plays a crucial role in the global economy. Translation: Washington has dropped the ball on dealing with the problem in the financial crisis -- bad assets. Will someone please pick it up?
He has a point. Treasury has spent hundreds of billions of dollars through its Troubled Asset Relief Program (TARP), but the distressed asset mess is still undermining the lending capacity of financial institutions.
What is more, the public now appears fed up with "bailouts" and "earmarks" and doublespeak from Washington. When Treasury finally gets around this week to asking taxpayers to open their wallets to fund the long-awaited "public-private" solution to the toxic asset quandary, Congress may balk. What then?
There is no small irony in the fact that the socialist president of Brazil is now smarting from too much government intervention in the U.S. Had financial institutions been told months ago that rescue is not an option, things would be different. Instead of waiting for the Treasury, they might have begun deconstructing bundled assets to figure out their worth and how to raise new capital. Allowing illiquid assets to be priced using cash-flow analysis for regulatory purposes months ago would have helped too. The government could even have acted as lender of last resort, with stipulations on dividends until the loans were repurchased.
None of that happened, and now the Federal Reserve is being instructed to paper over the problems. In the process it risks crashing the dollar. That may boost the prices of Brazil's commodity exports, at least in nominal terms, but it's not a recipe for restoring to health the economy that Mr. da Silva says is so necessary to global growth.