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Dilma in the vortex

 

JUST as animals can smell fear in humans, financial markets pounce when they sniff government paralysis and division. So it was with Brazil in late September. In a fortnight the real plunged from 3.8 to the dollar to 4.2. Only when the Central Bank stepped in, offering dollars, was a semblance of calm restored. The immediate reason for the mayhem was the decision last month by Standard & Poor’s, a rating agency, to downgrade Brazil’s credit rating from investment grade to junk. That in turn was the inevitable result of the government’s fiscal adjustment coming apart at the seams.

   

After Dilma Rousseff narrowly won a second term as Brazil’s president a year ago, she signalled a change of economic course. Loose fiscal policy had pushed public debt to 60% of GDP in her first term. So she brought in Joaquim Levy, a fiscal hawk, as finance minister. He set a target of a primary surplus (ie, before interest payments) of 1.2% for this year (compared with a primary deficit of 0.6% in 2014) and of 2% next year.

Mr Levy said he could achieve this merely by trimming discretionary federal spending (on things like student and housing grants) and by abolishing some tax breaks. But he underestimated the severity of Brazil’s recession—the economy is set to contract by 3% this year—and the consequent fall in tax revenues. Fatally, instead of announcing stiffer spending cuts, Mr Levy loosened his targets. The economic team made a complete mess of next year’s budget, saying at first that it would involve a deficit and backtracking only after the downgrade.

It is an open secret in Brasília that Mr Levy wanted harsher measures. But the president declined to back him. She is at best a reluctant convert to austerity, and she lacks the authority to impose it. She has lost control over Congress, which must approve the cuts to legally mandated spending (on pensions and transfers, for example) which are now required. Moreover, she is also deeply unpopular (see chart), for two reasons. The first is a baroque corruption scandal in which politicians from her ruling Workers’ Party (PT) and its allies are accused of skimming some $4 billion from contracts awarded by Petrobras, the state oil company. The second is that the recession is biting into living standards. Brazil is losing 100,000 formal jobs a month, notes Eduardo Giannetti, an opposition economist. He says that “people are very fearful for the future”.

Rather than sorting out the economy, Ms Rousseff’s priority has become survival, week by week. Later this month the Federal Audit Court is likely to reject last year’s public accounts as irregular. And the electoral court is investigating whether her re-election campaign in 2014 benefited from corrupt donations. Either issue could trigger an attempt to impeach her. The opposition claims to have more than the simple majority of votes in the lower house of Congress required to start the process, though not the two-thirds needed for impeachment itself. So the president’s task this week is to prevent the PT’s main coalition partner, the centrist Party of the Brazilian Democratic Movement (PMDB), from jumping ship, by offering it bigger jobs in a slimmed-down cabinet.

Ms Rousseff may yet be able to muddle through in this fashion until 2018. Both the PMDB and the opposition are hesitant about inheriting the economic mess if they push her out. But there is a real risk that in the coming months the president will find she can no longer govern. Only a credible fiscal squeeze can restore confidence in the currency and allow the Central Bank to cut interest rates, opening the way to recovery. But the PT is openly critical of Mr Levy’s policies. And the centre-right opposition has hypocritically voted against austerity measures it believes in.

Waxing and waning: Brazil's economic woes, in charts

 

Ms Rousseff claims that impeachment would be a “coup”. That is false. At the least, it would be a recognition that she won her second term on a false prospectus of continued welfare spending. The PT itself tried (and failed) to impeach Fernando Henrique Cardoso, a former president, months after he won a second term. Yet barring clear evidence of wrongdoing, impeachment would be deeply divisive.

Ms Rousseff also says that as a former urban guerrilla who survived torture, she would never bow to pressure and resign. But if the economic crisis worsens, she may find herself in an untenable position. One recent opinion poll by Ideia Inteligência found that of 20,000 telephone respondents, 64% said that the president would not complete her term. Of these, 60% thought she would resign. It is starting to look as if they may be right.

 

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