Brazil: Cheaper money to stimulate the economy

The government is determined to further reduce interest rates, Veja magazine is mired in Cachoeira corruption scandal, and Belo Monte workers end strike. 

Striking workers at the entrance to the Belo Monte construction site

Cheaper money to stimulate the economy

For Minister of Finance Guido Mantega, credit in Brazil is still too expensive to sustain a return to stronger economic growth.

Mantega demanded banks to reduce the spread between the interest rate claimed for loans and the base rate (SELIC) set by the government.

They would otherwise risk losing customers to Banco do Brasil and Caixa Econômica, two publicly owned institutions.

The Minister also wants to bring the real interest rate (the difference between SELIC and inflation) to 2%, down from 4-7% in the last couple of years. The government therefore intends to continue the series of interest rate cuts over the past 12 months, surprising most analysts (see our previous post).

Cheaper money is expected to stimulate corporate investment and take pressure off the overvalued Real, both hoped to help reverse the recent reduction in industrial output. Over the course of this year, the Real has only given in 3% to the dollar, despite the interest rate cuts and a series of interventions in the foreign exchange market.

To pave the way for a further reduction in the SELIC rate (currently at 9%), President Dilma Rousseff on Wednesday decreed changes in savings account regulations. Dilma wants to avoid a situation where savings accounts yield higher interest than the SELIC-bound treasury bonds, which would cut the government off its own credit lines. The presidential decree (medida provisória) needs to be approved by Congress within 120 days to remain in effect.

The move is politically charged for two reasons: Deposits in savings accounts are most Brazilians’ only financial investment, as interest on them has been guaranteed by the government since the mid-19th century. Meddling with this model might remind savers of former President Collor’s ill-fated attempt to curb inflation by freezing all assets in 1990. Furthermore, as the changes show the government’s resolve to further reduce interest rates, some analysts warn of a return to high inflation, after an 18-year period of price stability.

Yet Minister Mantega does not regard inflation as a risk in the current economic climate, instead raising the hope that lower government expenses on treasury bonds would allow tackling taxes, which are unusually high in regional comparison.

Meanwhile, the Brazilian Institute of Statistics (IBGE) published figures showing that industrial production in March 2012 fell 2.1% from a year earlier, after having been forecasted to increase by most economists.

Media become entangled in Cachoeira scandal

Carlinhos Cachoeira, charged with leading an illegal gambling syndicate and bribing politicians, has maintained closed links to Veja, Brazil’s best selling weekly news magazine. Although the Police still have not revealed the records of more than 200 phone conversations between Cachoeira and the head of Veja’s Brasília office, available evidence suggests that Cachoeira used the magazine to artificially create scandals and thereby damage politicians who got in the way of his illicit enterprises.

Among the victims are the governor of the Federal District and the director of the National Department of Infrastructure and Transport (Departamento Nacional de Infraestrutura de Transporte – DNIT). Whereas left-wing commentators compare the intrigue to the British Murdoch media affair, one can note a somewhat suspicious absence of reports on the matter in media outlets pertaining to Brazil’s four big groups: the publishers of Estado de São Paulo and Folha de São Paulo, the Globo group, and Editora Abril, which owns Veja.

Workers end strike at Belo Monte hydroelectric power station

7,000 workers are returning to the site of the future Belo Monte hydroelectric power station. The Union of Industrial and Construction Workers (Sindicato dos Trabalhadores nas Indústrias da Construção Pesada – Sintrapav) ended their strike after it was declared illegal by the region’s labour court, which threatened the union with a fine of 200,000 Reais for the loss of any further working day (circa £ 65,000). The union wants to appeal against the decision.

Workers demand a trebling of their fixed monthly food payment, as well as the right to nine days of paid leave to visit their families every three months, rather than every nine months, as is currently the case.

Construction at Belo Monte, situated in the Amazon forest, has begun about nine months ago. Projected to be finished in 2015, it will be the world’s third largest hydroelectric power station, after China’s Three Gorges damn and the Itaipú station on the border between Brazil and Paraguay.