How the markets now run Brazil …

… with or without Henrique Meirelles.

Brazil’s democracy has added a new feature in the last few years: people can vote for a president, but the markets retain the right to deploy an ‘impeachment put’ if that president is messing up the economy.

For proof, look no further than the fate of former president Dilma Rousseff. Her impeachment in 2016 was legally based on fiscais pedaladas (accounting irregularities). That she was almost alone among powerful politicians not to be cited in the sweeping Lava Jato corruption enquiry was not enough to save her. External forces still found a way to oust her from office.

Now, two years later, few senior market participants even bother to pretend the accounting charge was anything other than a markets-driven constitutional fig leaf to remove a bad president, whose terrible economic policies pushed the country into its deepest ever recession.

Speaking at a Credit Suisse Investors Forum earlier this year, Luis Stuhlberger, chief executive and chief investment officer of Verde Asset Management, said: “The conclusion that one reaches is that any candidate will do [fiscal] reforms in 2019, either proactively or reactively, because if we have a [president] with very different ideas, he or she will be impeached. Because if GDP goes down, the recession will come back, and he or she will be ousted. This has been clearly demonstrated.”

Stuhlberger, an investor revered by many in Brazil, added: “In the past, when I was more pessimistic and I thought [Rousseff’s] impeachment wouldn’t happen, a senator told me: ‘If you are in the presidency without the ability to govern, we will find a way to get you out.’ I think this is clear in the minds of everyone.“

Paulo Guedes, another well-known Brazilian financier, populist candidate Jair Bolsonaro’s economic adviser and potential minister of finance, effectively said the same thing: “It used to be that inflation had to be 2,000% to be impeached, but now if it’s at 10%, the president is ousted.”

Guedes then also compared the impeachment on accounting grounds with Al Capone’s prosecution for tax evasion.

Stuhlberger and Guedes were just saying in public what many are now increasingly happy to say in private.

“Our system has checks and balances, and Dilma was ousted according to the constitution,” one banker tells Euromoney. “One can argue whether the pedaladas were the real reason – and of course they weren’t, she was running the country into the ground and if she hadn’t been impeached in 2016, god knows where we would have been today. At the beginning of 2016, our economic team forecast a 4% contraction in GDP, but they said it might very well be 5%. Can you imagine?”

As Euromoney reported in May 2016, powerful business leaders were in fact the ones pushing politicians to remove Rousseff, as refinancing risks threatened to create a wave of corporate defaults throughout Brazil.

In 2012, Brazilian corporates and financial institutions raised $46.8 billion in the international markets – a much cheaper source of finance than local banks or capital markets. By contrast, in 2015, the total raised in the international markets was just $7.2 billion. In the first five months of 2016, no deals had come to those markets. The markets had given their own vote of no confidence in Rousseff.

Banks did the same. Their provisions against the threat of corporate insolvencies spiked; in 2015, 5,500 companies sought bankruptcy protection – the most since 2008 – with forecasts of many thousands more to come as financial market liquidity evaporated.

Pressure built. The vent was impeachment.

For the full article visit Euromoney Latin America’s first issue


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