Brazil: Business Likes Lula--but Wall Street Doesn't

International investors are holding their breath as Brazilians head to the polls on Oct. 6 to elect a new President. No one knows how Wall Street will react if Luiz Inácio Lula da Silva wins outright or if voting goes to a second round on Oct. 27. Known simply as Lula, the 56-year-old leader of the left-wing Workers Party (PT) is ahead of his closest rival, government-backed candidate José Serra, by some 25 points in opinion polls, with 45% support. Brazil's currency, bonds, and stocks have been hammered as Lula's popularity has risen. Worse, billionaire investor George Soros has predicted that Brazil could default on its $260 billion in net government debt if Lula wins, triggering an emerging markets crisis.

So there would be no honeymoon for this onetime metalworker if he is finally victorious in his fourth presidential bid. While he wouldn't take office until Jan. 1, Lula would have to send strong signals right away to calm the markets. What's interesting is that Brazilian businesspeople seem far less alarmed than Wall Street at the prospect of a Lula presidency. "Lula has grown up a lot," says Sergio Haberfeld, chairman of Dixie Toga, a packaging company with $333 million in sales, who backs the former union leader. "He became less of a revolutionary man and more of a statesman. I would never have supported him in the past."

It's not just that Lula has swapped his jeans for dark suits. He has also traded his anticapitalist rhetoric for a pragmatic approach that accepts the need to meet fiscal targets negotiated with the International Monetary Fund. His running mate, José Alencar, a Liberal Party senator, is president of one of Brazil's biggest textile manufacturers, Coteminas. And Lula is backed by senior figures in the powerful São Paulo Federation of Industry.

Indeed, much of big business is behind Lula because he's promising to speed up growth and to take a tough line with the U.S. in negotiations for a Free Trade Area of the Americas. During President Fernando Henrique Cardoso's eight years in power, Brazil contained inflation, but the economy expanded by just slightly more than 2% annually. Lula wants state programs to encourage companies to make goods for export and as substitutes for pricey imports. And he has declared that he would be "as intransigent in protecting the interests of Brazil as the U.S. has been in protecting its own interests." He has also vowed to overhaul Brazil's near-bankrupt pension system and simplify its nightmarish tax code--reforms business favors.

But before he can make any of these moves, Lula will have to deal with an impending debt crisis. The big problem is the $205 billion the government owes to Brazilian lenders, one-third of which is pegged to the U.S. dollar. That's dangerous, since the amount of debt increases as the real falls--and the real plunged 22% in September alone, to a record against the dollar. Although Lula has pledged the government will pay its debts, some investors fear he may be forced to reschedule payments if the real keeps weakening. Worries about default are also driving up interest rates on Brazil's foreign debt. To try to ease investor worries, Lula is expected to make an early announcement of his choice for Central Bank president if he wins. Local press reports have said a leading candidate is Henrique Meirelles, former president of BankBoston Corp. and well known to Wall Street.

Lula's problem is that even if he is the victor, he can't do much more than assemble his team and make initial policy announcements before he takes power. Still, the fiery former labor leader has done a surprising job of convincing Brazilian business to climb onto his bandwagon. Now he must get Wall Street on board.

By Jonathan Wheatley in São Paulo

Edited by Rose Brady

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