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Saturday, 28 September, 2002, 03:15 GMT 04:15 UK
Financial woes hit pre-election Brazil
Brazilian stock traders
Markets in Brazil have seen new lows this week

Brazilian financial markets are ending a bruising week, during which the currency and its stock index have hit record lows.

With a week to go until the presidential election in Brazil, many economists and business leaders blame the crisis on investors' fears of a victory in the election for the left-wing candidate, Luiz Inacio Lula da Silva.

There are concerns that this could in turn push the whole region into recession.

But others say Brazil's economic crisis has deeper roots.

The IMF has long held up Brazil as a model for recipients of international bailouts.

But now, everything seems to be going wrong.

Investor pull-out

Many economists and business leaders in Brazil are blaming this on short-term election jitters.

Luiz Inacio Lula da Silva
Can Lula bring brighter financial days?
The whole crisis, this argument goes, has been sparked by the increasingly likely victory of Lula, as he is known, in presidential elections.

He is leading by 20 percentage points in the polls.

International investors are worried that he might mismanage the economy or push up public spending, making it impossible for Brazil to pay its $260bn public debt.

So investors have pulled out en masse.

As soon as the election is over, according to this hopeful argument, and Lula shows that he is no longer the radical he was and puts some market-friendly names in charge of the economy, then everything will go back to normal.

Debt default

But a growing number of voices express worry that Brazil's problems may be more deep-seated.

A trader in Sao Paulo
The financial markets fear worse to come
It is the size of the debt, they argue, which is crippling the economy, and they say Brazil should never have opened up so quickly to outside capital, which in a climate of global uncertainty is bound to take its money to safer shores.

They also warn that the market, by pushing down the currency and stocks to record lows, is creating a self-fulfilling prophecy.

As the currency devalues, it gets harder and harder for the government and companies to pay debts based in dollars.

Fearing a debt default, international investors are creating the conditions to provoke one.


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