Rousseff Revives Policies That Pushed Brazil to Edge of Junk

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Breaking Down the Unrest in Brazil

Brazil’s President Dilma Rousseff is reviving policies that helped push the country’s debt rating to the brink of junk status as a political crisis and a recession erode support for fiscal discipline.

State-controlled banks Banco do Brasil and Caixa Economica Federal announced this week that they will provide car and auto-parts makers as much as 14 billion reais ($4 billion) in loans, a strategy to fuel growth and save jobs that Finance Minister Joaquim Levy repudiated when he took office earlier this year. He told reporters Wednesday the loans don’t threaten the fiscal adjustment and are mostly based on market rates.

The government is providing loans to companies and retreating from some plans to increase taxes as Rousseff seeks to regain support and resist calls for impeachment. The moves, reminiscent of policies implemented by former Finance Minister Guido Mantega, offer relief to companies being squeezed by a contracting economy and try to rebuild bridges with former allies.

Rousseff’s “crisis of legitimacy has reduced the capacity of the presidency to implement its economic agenda,” Rafael Cortez, political analyst at Tendencias consulting firm in Sao Paulo. “Some measures go against the adjustment. It isn’t a change of course, but specific measures that may lead to a more timid adjustment and delay it.”

Banco do Brasil fell as much as 4.7 percent in Sao Paulo after disclosing its plan to aid the automaker industry, helping to push the Ibovespa stock exchange close to bear market territory.

Profitable Agreement

Alexandre Abreu, chief executive officer for Banco do Brasil defended the measures saying the accord with the government is “profitable for the bank.”

“The bank will charge borrowers market interest rates. It won’t have subsidized rates,” he told reporters in Sao Paulo Wednesday.

The government’s recent moves are also a sign Rousseff is yielding to lobbyists and legislators in an effort to rebuild her alliance and fend off attempts to remove her from office, according to David Fleischer, a professor emeritus of politics at University of Brasilia.

Levy’s plan to control inflation and narrow the budget deficit has the support of investors but has so far failed to unwind bets that the economy will continue to contract and inflation remain above target.

Low Popularity

After almost a year of interest rate increases, higher taxes and spending cuts, Brazil’s economy will shrink this year and next, constituting the longest recession since 1931, a central bank survey of economists shows. Unemployment is rising, the budget gap hasn’t narrowed and inflation is more than double the official target.

To complicate matters, Rousseff’s popularity has plunged to the lowest for any president since the return of democracy in 1985.

Roberto Padovani, chief economist at Sao Paulo-based Votorantim Ctvm, said he doesn’t fear the resumption of policies such as capital injection into state companies and tax cuts, that led to the imbalances Levy is now trying to fix.

“It is not a return to the previous strategy, but it reinforces the perception that the ability to stick to the adjustment is exhausted,” Padovani said.

Senator Gleisi Hoffmann, Rousseff’s former chief of staff, watered down on Tuesday a government proposal to boost taxes on banks. Trade Minister Armando Monteiro Neto said Wednesday that the loans that will be provided by the state banks are “important” because credit is retracting in the economy.

“Things have deteriorated at a pace that has exceeded even the most bearish expectations,” Dan Raghoonundon, a Denver-based money manager at Janus Capital Management LLC, said. “There was a lot of hope associated with Levy, and he’s worked very, very hard. But the fiscal adjustment isn’t going well.”

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