Brazilian Finance Minister Joaquim Levy spent seven straight hours on Tuesday trying to convince Brazilian senators that austerity was the country’s only chance to beat insolvency and keep its sovereign credit rating from falling into junk territory. “The cost of losing investment grade would be enormous,” Levy told the Senate economic affairs committee.
So, no more subsidized utility rates, underpriced gasoline, soft loans to favored companies, tax breaks or fiscal “bicycling” — putting off this month’s bills to next month — to pretty up the government books, Levy added, deflecting broadsides with good humor and dire PowerPoint graphics.
One eloquent slide showed how foreign investment surged after the country reached investment grade in 2008 and 2009, suggesting it could also tailspin if Brazil were to tumble from grace.
Investors seemed pleased. The Brazilian real rallied, and the battered Sao Paulo stock market surged on Wednesday, led by Petroleo Brasileiro SA, the scandal-ridden oil company. The same day, Petrobras signed a $3.5 billion loan deal with China.
Levy’s arguments didn’t sway everyone, however. A poll released Wednesday showed that rising taxes and interest rates — both keys to Levy’s plan — now top national worries, trumping declining education, health care and public safety.
He also knows he must get Spartan measures through a legislature more accustomed to Mammon and practiced in the art of holding the government to ransom. A glimpse of the trouble to come was the lower house’s recent vote to ease state finances through softer lending rates and easier terms for repayment. Levy managed to stall the Senate vote but not kill the bill, which could cost taxpayers three billion reais (more than $954 million) this year.
What’s new is that President Dilma Rousseff finally seems persuaded that her fortunes are tethered to Levy, who has become Brazil’s latest superminister. Not since the days of military rule has a bean counter enjoyed this much prestige in Brasilia. “Levy has become the master-fuse minister,” former finance minister Mailson da Nobrega told me. “If he shuts off, the country goes dark.”
This is an odd arrangement. Levy was in the fifth grade when companheira Vanda — one of Rousseff’s noms de guerre — was caught planning heists and running guns for the revolution. She survived the dictator’s dungeons to become a career technocrat, with a micromanager’s iron hand and a soft spot for polysyllables that only a Marxist-Leninist could love.
Levy studied naval engineering, then economics, and earned his Ph.D. at the University of Chicago, the bulwark free-market orthodoxy that was the symbol of everything the Latin left loathed.
They clashed publicly while serving together under former president Luiz Inacio Lula da Silva, who had hired Levy to keep Brazil’s books in order and reassure creditors that the Workers’ Party leader was not Fidel Castro in a suit.
When Levy, in 2005, defended a plan to slash expenses to erase the public deficit, Rousseff, then Lula’s chief of staff, slapped it down as “rudimentary.” She ran for reelection last year on an openly capitalist-bashing platform, warning that a victory by the likes of Levy would snatch food from Brazilian dinner tables.
Now Rousseff and Levy are Brazil’s newest best friends. “Levy is very important, and he stands firm,” she told Bloomberg News in an interview this week.
Whether the love can last remains to be seen. With her approval ratings at record lows and Brazilians facing recession, stagflation and job losses, Rousseff is bleeding political capital. And while most of the fiscal adjustment can be implemented by executive order, Brazilian legislators — and many of Rousseff’s 39-minister cabinet — are masters at dreaming up new ways to raid public coffers.
The best news is that the capitalist and the onetime guerrilla are on message. In her interview with Bloomberg News, Rousseff endorsed “huge” budget cuts. “I will do everything to meet” Levy’s fiscal targets, she pledged.
Milton Friedman couldn’t have said it better.
Mac Margolis is a Bloomberg View contributor based in Rio de Janeiro.
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