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Monday, 23 September, 2002, 22:46 GMT 23:46 UK
Brazil markets braced for Lula victory
Brokers in Sao Paulo's Bovespa exchange
A Lula victory has investors running scared

With Brazil's presidential election less than two weeks away, the fact that Workers' Party left-winger Luiz Inacio "Lula" da Silva is probably going to win is finally sinking in.

The response: to hammer the Brazilian currency, the real, to sell shares and to back away from buying government bonds, apparently from fear that if he wins the economy will be the first to suffer.

No matter that Lula's victory on 6 October (the other left-wing candidate, the Popular Party's Ciro Gomes, is now fading fast) has long been predicted.

Nor that Jose Serra - former health minister, anointed successor of free marketeer President Fernando Henrique Cardoso and darling of international markets - has never come close to matching his poll standing.

In front

The latest poll has Lula at 44% on his third shot at the presidency, while Serra lags on 19%.

Brazil's leading presidential candidate Luiz Inacio 'Lula' da Silva
Lula wants to avoid dealing with the IMF
In electoral terms, the survey from Datafolha put Lula within touching distance of a first round victory, which requires 50% of the vote.

The figures are not new; throughout the campaign Lula has led, with Serra rarely making it much past 25% and - until recently - Gomes often taking the second spot.

The only difference is that Lula has never looked so close to winning outright, without even a second round of voting.

Spurning orthodoxy

Analysts say the favour shown the left wing is hardly surprising.

President Cardoso and Mr Serra are anointed by the international financial institutions, the World Bank and the IMF, as proponents of orthodox financial policy.

Yet to Brazilians "orthodox financial policy" is what has almost bankrupted neighbouring Argentina, damaging most of the rest of Latin America in the process.

Voting for more of the same under these circumstances - amid recent statistics which demonstrate that the gaping inequality in Brazilian society has grown much worse under Cardoso - might seem somewhat suicidal.


And yet with every opinion poll that shows Lula's lead increasing, investors seem to act surprised that their man looks like he is out of the running.

People are rushing to price in a Lula victory

Clive Botelho
treasury director, Banco Santos
Monday's performance is one that has been repeated over and over again.

The real has fallen more than 35% in 2002, and is now at an all-time low of 3.57 to the dollar, down 4.6% on the day.

Sao Paulo's Bovespa index dropped 3.35% to 9,264.17 points in thin, nervous trade, taking the year's fall to 32%.

And as a new survey showed Brazil to have fallen from 3rd place to 13th in the list of preferred foreign investment destinations, the cost of servicing Brazil's $330bn foreign debt is soaring.

That could generate a self-fulfilling prophecy, as some players in the market are betting the country will follow Argentina into default.

Pricing it in

Lula himself has promised not to stray too far from orthodoxy, committing his government to fiscal austerity and solid policies - conditions laid down by the IMF for a recent $30bn loan.

But that has failed to calm market jitters.

"Political concerns have been shaking up our markets for months now," said Clive Botelho, treasury director at Banco Santos in Sao Paulo, "but the Datafolha poll is taking things to another level.

"People are rushing to price in a Lula victory."


But despite the carnage, there are some signs that the world is adjusting to a near-certain Lula victory.

Investors are beginning to inquire who his economic team might include, and any early announcement of names seen as reliable could help calm nerves.

On top of that, Brazil's real economy seems to be getting better: Monday's weekly trade balance was one of the best in eight years, showing a $929m surplus.

And Brazilian businessmen who once would have never been seen in the same room as former factory worker Lula are lining up to show support.

Last weekend, electronics magnate Eugenio Staub appeared in a series of TV spots backing Lula, the second high-profile businessman to do so.

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See also:

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