Trying to Gag Lula

     Trying 
to Gag Lula

    By
    creating phony crises, the media is falling into the hands
    of those who profit from this volatility—the speculators,
    many of which are the big Brazilian banks. A free news
    media is essential in any democracy, but much of
    what the media produces is of little or no value.
    by:
    John Fitzpatrick

     

    Mid-May,
    President Luiz Inácio Lula da Silva was criticized by a section
    of the local media for commenting on the exchange rate. One week later,
    Vice-President José Alencar also came under fire, for commenting
    on interest rates. While Lula expressed concern at the possibility of
    Brazil’s currency, the real, falling against the U.S. dollar—thereby
    affecting Brazil’s export boom—Alencar made a guarded criticism
    of the Central Bank’s decision to keep the benchmark interest rate at
    26.5 percent.

    Both
    leaders should ignore this media assault, and voice their views as openly
    as the columnists who make a living publicizing their opinions. The
    media is not only being naïve and hypocritical, but is playing
    into the hands of vested interests by exaggerating the importance or
    griping whenever Lula—and now Alencar—says anything which
    the media feels might rock the boat. A president cannot be expected
    to spend his term of office walking on eggs. Problems will not go away
    by pretending they do not exist.

    At
    the moment, the country is split into those who believe interest rates
    could be cut without leading to a resurgence of inflation, and those
    who feel that inflation is still a threat. The former are probably a
    majority. Despite this, much of the media recommends a softly, softly
    approach. In their view, Lula must not open his mouth and say anything
    that could upset the market and adversely affect the exchange rate,
    the Brazil risk, the upturn in the stock market and other key indicators.

    This
    would be reasonable advice if it were proven to work, which hasn’t been
    the case. Since the start of his administration, Lula and his cabinet
    have shown discretion. While this approach may have prevented matters
    from getting worse, it has not prevented volatility, which is as much
    part of Brazilian life as Carnaval. It is like one of those never-ending
    novela soap operas: on Monday, the market is euphoric, the real
    has strengthened, the Brazil risk has fallen, the Bovespa (São
    Paulo Stock Exchange) index is up; on Tuesday the market is disappointed,
    the real has fallen back, the Brazil risk has risen, the Bovespa index
    is down; on Wednesday, the market has recovered, the Real is up, the
    Brazil risk is down ad nauseam…

    Media
    Plays the Speculators’ Game

    Journalists
    and analysts always come up with explanations for this topsy-turvy madness—housing
    statistics in the U.S., the inflation outlook for São Paulo,
    a successful debt issue made by a Brazilian bank abroad, a drop in oil
    prices and so on. We, the readers, are expected to believe that the
    Brazilian economy will rise or fall on such incidentals, and that if
    Lula were to voice the sensible opinion that interest rates are too
    high, then the whole economy will collapse like a pack of cards.

    By
    highlighting matters like these and creating phony crises, the media
    is falling into the hands of those who profit from this volatility—the
    speculators, many of which are the big Brazilian banks we pass in the
    street every day. A free news media is essential in any democracy, but
    much of what the media produces is of little or no value. Most news
    stories are as much of a commodity as an orange or a lump of iron ore.
    Newspapers or magazines need to fill a certain number of pages and,
    since there is often no real story around, journalists inflate the importance
    of weak material.

    In
    the U.K., journalists refer to these quiet periods as the "silly
    season". Let me give an example of how the system works. In the
    early 1990s I worked as a correspondent for a financial news agency
    in Zurich, and had to provide running stories throughout the day. An
    item ahead of the opening of the stock market might have the headline
    "All eyes on Nestlé’s quarterly results", implying
    that when these results were revealed, the whole stock market would
    somehow respond dramatically.

    Where
    did this information come from? Well, in the 10 hectic minutes I had
    in which to meet a deadline, I had been unable to talk to more than
    one trader. The one I finally got hold of had less than a minute and
    said something like: "Oh yes, we’re waiting for the Nestlé
    quarterly figures. Goodbye."  Since I had no other material
    I would write something like "The Swiss stock market is awaiting
    Nestlé’s quarterly results, which are due to be announced at
    11 a.m. The market closed down yesterday in light trading due to etc."
    The rest of my story was a rehash of the previous day’s closing piece,
    which, in turn, was based on similar quotes, grabbed from anyone who
    had a spare moment to talk to me. For any serious investor, my stories
    were of no value whatsoever.

    Covering
    the foreign exchange and bond markets was even worse in terms of getting
    reliable information. When option expiry dates were close, no one knew
    what was happening. People would spread rumors* to try and push up the
    price of a share, while others were trying to push it down. In some
    cases traders were betting either way. At other times, analysts would
    release reports on companies that invariably had "buy" recommendations.
    These would be followed by road shows and presentations, in which glowing
    reports would be made of companies or sectors.

    The
    press dutifully printed this because it had to print something. Last
    year, the CEO of the Financial Times criticized journalists for
    failing to foresee the Enron crisis. She lamented the lack of specialized
    knowledge which, she claimed, meant the journalists had not been able
    to interpret balance sheets. The lack of time, rather than specialized
    reporters is, I think, a more likely explanation.

    "F—ing
    bond salesmen on Wall Street"

    When
    Bill Clinton started his first term of office, economic advisers told
    him that the most important indicator was the market price of 30-year
    U.S. treasury bonds. He was advised to bear this in mind, and be careful
    of saying anything that could adversely affect market prices. Clinton
    was reportedly astonished and said something like: "You mean I
    have to govern the country thinking of what is good for a bunch of f—ing
    bond salesmen on Wall Street?" "Yes, Mr. President,"
    replied the talking heads**.

    Clinton
    got round this issue by appointing as his treasury secretary, Robert
    Rubin*** who, as Co-Chairman of Goldman Sachs, could presumably handle
    the "bunch of f—ing bond salesmen on Wall Street." After
    that, Clinton, the Democrat, could sit back and let Rubin handle all
    the crises that came his way in a way that, ironically, Bush, the Republican,
    has failed to do so far.

    The
    point I am trying to make here is that comments by Lula or Alencar make
    no difference, as long as the economy is in "safe" hands,
    meaning hands the market trusts. These "safe" hands currently
    belong to Finance Minister Antonio Palocci, who has Lula’s complete
    confidence. Palocci has been playing the Wall Street bond salesmen’s
    game, as did his predecessor, Pedro Malan. Central Bank President, Henrique
    Meirelles, is doing likewise, as did his predecessor, Arminio Fraga.
    In a globalized economy, in which capitalism has no rival, Brazil has
    no other choice.

    The
    decision by the Central Bank to maintain the basic interest rates at
    26.5 percent was applauded by the market. Why? Because, according to
    the Brazilian media, the decision showed that the Central Bank would
    not give in to political pressure to cut rates. If you believe that,
    then you believe anything…

    A week
    before the decision, during a visit to Spain, Meirelles made it quite
    clear that rates would not be cut. This led to a hyped build-up to this
    week’s meeting of the monetary policy committee, known as COPOM. One
    member was quoted as saying the committee was coming under tremendous
    political pressure to lower the rate. Conventional wisdom had it that
    any backtracking by the COPOM would put the Central Bank’s credibility
    in question, and hold back the prospect of it gaining greater autonomy.

    It
    is now clear that the whole episode was exaggerated, if not prefabricated
    to give the impression of an independent-minded body taking the right
    decision for the long-term good of the country, rather than caving in
    under pressure. However, the press does not seem to realize this and,
    at the time of writing, the saga is continuing.

    Alencar—Vice
    President with a Face

    As
    for Alencar, he has been consistently critical of Brazil’s interest
    rates, which are among the highest in the world. The base rate of 26.5
    percent rises to around 60 percent when other elements, such as bank
    profits, administration charges and taxes are added.

    Alencar
    is a successful businessman and has hands-on experience of the problems
    of investing when credit is so costly and scarce. Since Alencar is also
    only a heartbeat away from the presidency should anything happen to
    Lula, then it is good to know his opinions and style. He is certainly
    an enormous contrast to his faceless predecessor, the skeletal Marco
    Maciel, who looked like a Harry Potter villain and was virtually unknown
    to the public.

     

    *
    "A rumor’s just a premature fact" says one of the characters
    in the film version of the book Barbarians at the Gate: The Fall
    of RJR Nabisco. Oh, no, it’s not…

    **
    I cannot remember exactly where I read this, but it may have been
    in the book by Clinton’s press spokesman, George Stephanopoulos, All
    Too Human: A Political Education, released in 1999. I would be
    grateful if any reader could confirm this, or provide me with the
    source.

    ***
    Robert Rubin is currently Chairman of the Executive Committee of the
    Board of Directors at Citigroup.

     

    John
    Fitzpatrick is a Scottish journalist who first visited Brazil in
    1987 and has lived in São Paulo since 1995. He writes on
    politics and finance and runs his own company, Celtic Comunicações—
     www.celt.com.br,
    which specializes in editorial and translation services for Brazilian
    and foreign clients. You can reach him at jf@celt.com.br
     

    ©
    John Fitzpatrick 2003

    This
    article appeared originally in Infobrazil, at www.infobrazil.com

     

     

     

     

     

     

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