Nelson Barbosa could, of course, turn out to be the man who fixes Brazil’s finances, tames soaring inflation and revives the sinking economy, but investors sure aren’t betting on it.
Financial markets sank for a second session on Monday after news spread that
Barbosa would be the country’s next finance minister, replacing the beleaguered Joaquim Levy. Both the currency and stock market fell more than 1 percent on Monday, extending the two-day losses to about 4 percent.
That harsh reception is the exact opposite of the broad rally that greeted Levy when he took the post a year earlier. Levy, though, was the market’s golden boy, with his University of Chicago-training, asset-manager experience and reputation as a fierce budget cutter. Barbosa, while generally respected by analysts for his technocratic skills, isn’t seen as being quite as tight-fisted on spending, a perception he only reinforced when suggesting Friday that he was amenable to granting subsidies to some industries.
What’s more, the crisis that Barbosa will step into when he’s officially sworn in Monday is markedly more severe than it was a year ago. The economy is now shrinking at a 7 percent annual pace; the budget deficit has swelled to the widest in at least two decades; the country’s investment-grade rating is gone; Congress is bogged down in impeachment proceedings against President Dilma Rousseff; and the greatest corruption scandal the country has ever known is showing little sign of abating. If Levy couldn’t stem the crisis when it was more manageable before, what reason is there to believe Barbosa will now?
“I don’t see that he has more political acumen or technical skill to do a better job,” said John Welch, a strategist at CIBC World Markets and long-time Brazil watcher. This year’s fiscal deterioration, Welch said, was in part the result of a plan to loosen targets that Barbosa helped establish years earlier. It’s “a flawed strategy because you need to have pressure on the politicians to adjust,” Welch said.
Markets Selloff
Like Levy, Barbosa served in the government during the economic boom years overseen by Rousseff’s predecessor, Luiz Inacio Lula da Silva. Levy was treasurer while Barbosa worked his way up to deputy finance minister. When Rousseff asked Levy to return to Brasilia after the country’s commodity exports sank and the economy stagnated, Barbosa followed him, settling in a few blocks down in Brasilia’s government quarter as planning minister.
Levy struggled almost from the outset, though, to reverse the widening budget gap. With legislators focused on the corruption scandal — which began at state-run oil giant Petrobras and has landed numerous executives and politicians in jail — little attention was paid to Levy’s pleas to cut spending.
His relentless push in Congress to curtail labor and pension benefits earned him scorn from many members of the ruling Workers’ Party, which traditionally championed a robust social safety net. Even some business leaders started to express concern that Levy’s struggles to shore up fiscal accounts were blinding him to the need to stimulate growth.
As the country’s finances worsened and the economy slipped deeper into recession, markets sank month after month. The currency is down 34 percent against the dollar this year. Prices on the government’s 10-year bonds have dropped to 81 cents on the dollar from 99 cents when Levy took office back in January. Their yield has climbed to over 7 percent.
The task of negotiating with Congress now falls to Barbosa, a 46-year-old economist who studied at the New School for Social Research in New York and started his career as a civil servant at the central bank in the mid-1990s. Workers’ Party leader Rui Falcao gave Barbosa a ringing endorsement Friday, calling him “very competent, able and good at dialogue.” While he may be closer to Rousseff’s party leaders than Levy was, analysts question whether he has the relationships with other factions of Congress to get much done.
“Barbosa doesn’t necessarily have better political connections with other parties,” said Cristiano Noronha, vice president of Arko Advice, a Brasilia-based political consulting firm. The presidential and Finance Ministry press offices didn’t respond to e-mails sent outside normal business hours seeking comment.
The strength of the minister’s ties may get tested quickly. In a conference call with investors on Monday he reiterated the government’s commitment to tame the deficit and cap pension spending. He also said he expected Congress to approve a tax on banking transactions, a proposal for which Levy never got support from legislators.
Equity and currency markets weakened further after his comments.
Financial markets sank for a second session on Monday after news spread that
Barbosa would be the country’s next finance minister, replacing the beleaguered Joaquim Levy. Both the currency and stock market fell more than 1 percent on Monday, extending the two-day losses to about 4 percent.
That harsh reception is the exact opposite of the broad rally that greeted Levy when he took the post a year earlier. Levy, though, was the market’s golden boy, with his University of Chicago-training, asset-manager experience and reputation as a fierce budget cutter. Barbosa, while generally respected by analysts for his technocratic skills, isn’t seen as being quite as tight-fisted on spending, a perception he only reinforced when suggesting Friday that he was amenable to granting subsidies to some industries.
What’s more, the crisis that Barbosa will step into when he’s officially sworn in Monday is markedly more severe than it was a year ago. The economy is now shrinking at a 7 percent annual pace; the budget deficit has swelled to the widest in at least two decades; the country’s investment-grade rating is gone; Congress is bogged down in impeachment proceedings against President Dilma Rousseff; and the greatest corruption scandal the country has ever known is showing little sign of abating. If Levy couldn’t stem the crisis when it was more manageable before, what reason is there to believe Barbosa will now?
“I don’t see that he has more political acumen or technical skill to do a better job,” said John Welch, a strategist at CIBC World Markets and long-time Brazil watcher. This year’s fiscal deterioration, Welch said, was in part the result of a plan to loosen targets that Barbosa helped establish years earlier. It’s “a flawed strategy because you need to have pressure on the politicians to adjust,” Welch said.
Markets Selloff
Like Levy, Barbosa served in the government during the economic boom years overseen by Rousseff’s predecessor, Luiz Inacio Lula da Silva. Levy was treasurer while Barbosa worked his way up to deputy finance minister. When Rousseff asked Levy to return to Brasilia after the country’s commodity exports sank and the economy stagnated, Barbosa followed him, settling in a few blocks down in Brasilia’s government quarter as planning minister.
Levy struggled almost from the outset, though, to reverse the widening budget gap. With legislators focused on the corruption scandal — which began at state-run oil giant Petrobras and has landed numerous executives and politicians in jail — little attention was paid to Levy’s pleas to cut spending.
His relentless push in Congress to curtail labor and pension benefits earned him scorn from many members of the ruling Workers’ Party, which traditionally championed a robust social safety net. Even some business leaders started to express concern that Levy’s struggles to shore up fiscal accounts were blinding him to the need to stimulate growth.
As the country’s finances worsened and the economy slipped deeper into recession, markets sank month after month. The currency is down 34 percent against the dollar this year. Prices on the government’s 10-year bonds have dropped to 81 cents on the dollar from 99 cents when Levy took office back in January. Their yield has climbed to over 7 percent.
The task of negotiating with Congress now falls to Barbosa, a 46-year-old economist who studied at the New School for Social Research in New York and started his career as a civil servant at the central bank in the mid-1990s. Workers’ Party leader Rui Falcao gave Barbosa a ringing endorsement Friday, calling him “very competent, able and good at dialogue.” While he may be closer to Rousseff’s party leaders than Levy was, analysts question whether he has the relationships with other factions of Congress to get much done.
“Barbosa doesn’t necessarily have better political connections with other parties,” said Cristiano Noronha, vice president of Arko Advice, a Brasilia-based political consulting firm. The presidential and Finance Ministry press offices didn’t respond to e-mails sent outside normal business hours seeking comment.
The strength of the minister’s ties may get tested quickly. In a conference call with investors on Monday he reiterated the government’s commitment to tame the deficit and cap pension spending. He also said he expected Congress to approve a tax on banking transactions, a proposal for which Levy never got support from legislators.
Equity and currency markets weakened further after his comments.
