Weekly Report 29 - September 05 - October 2001

I POLITICS

1.1 Jader Barbalho

On Monday evening, 01 Oct., the STF denied a second injunction request by Barbalho - this time against a decision by the Senate governing board. The next day the latter selected its 2nd Vice President, Antônio Carlos Valadares (PSB-SE) to report out the Barbalho case received from the Senate Ethics Committee (whether or not to install the investigation that would lead to his sacking from the Senate). It seemed obvious that Valadares would report in favor of the investigation, and promised his report by Friday, 05 Oct.

The Federal Police were awaiting Jader's resignation to indict him for the alleged crimes committed.

The vacant Senate seat caused by Barbalho's resignation is a matter of hot dispute - whether either or none of the alternates should be seated. Under Brazil's election system, Senators are elected with designated and totally unknown (usually) alternates, many times close relatives or allies, or persons who financed the campaign. There are no by elections to fill vacancies (as in the US Senate), except when the alternates themselves leave the seat vacant.

In 2000, when Sen. Luiz Estevão was sacked, his seat was taken over by a Brasília businessman with many pending accusations and court cases (tax evasion, etc.). Earlier this year, when Sen. Antônio Carlos Magalhães (PFL-BA) resigned, his son took over the seat. In the case of Sen. José Roberto Arruda (PSDB-DF), who resigned during the same ACM episode, paradoxically, the alternate was another Brasília businessman who had been greatly maligned by the same Luiz Estevão.

In the case of Jader Barbalho, his first alternate is his 82 year-old father, Laércio Wilson Barbalho, who is involved (and accused by public prosecutors) with most of Jader's suspect operations. He has stated that because of his delicate health he will not assume the Senate seat. The second alternate is Fernando Castro Ribeiro, lawyer, age 51, in good health, and Jader's private secretary. Ribeiro is accused of involvement in two of the cases that the Senate Ethics Committee investigated. Thus, many in the Senate have raised the question regarding whether either or neither of these alternates should be seated. If they are not seated, the state of Pará probably would have an empty seat until the new Senators are seated in 01 Feb./03, because less than 15 months of Jader's mandate would be vacant. However, this "deadline" is 31 Oct. 2001, thus leaving a 30-day interval that might provoke a by election in which Jader could become a candidate, if he resigns.

1.2 -Party Switching Comes to an End

This week marked the final "stretch" for party switching in Brazil prior to the Oct./2002 general elections. The election law stipulates that politicians who wish to run for office in 2002 must effect any switch of or joining of political party before midnight 5th October - one year before the next election. Since 01 Sept., some 29 members of Congress have switched parties.

Since the general elections in Oct. 1998 and the municipal elections of Oct. 2000, many politicians have switched party labels - Dep. João Caldas (PL-AL) changed party seven times since he was sworn in on 01 Feb./99. However, over the past 15 days many politicians have finalized their decisions - with considerable impact on national and state politics.

Note: Next week, Brazil Focus will have a more complete analysis on party switching.

Some examples to illustrate the phenomenon:
Rio Grande do Sul - Former Governor Antônio Brito left the PMDB for the PPS of Ciro Gomes following the defeat of his group at the PMDB-RS state convention, and took with him a group of state and federal deputies, and mayors, plus Sen. José Fogaça. However, this move has cost Ciro the support of the Lionel Brizola's PDT (Brizola and Brito had a falling out over the state election in 1998 and the 2000 municipal elections in Rio Grande do Sul). Brizola's move reportedly also demonstrated that the PDT was still open to Gov. Itamar Franco if he wants to leave the PMDB.

Minas Gerais - In addition to the threats from Itamar to leave the PMDB, Belo Horizonte Mayor Célio de Castro left the PSB for the PT. The main reason was that the PSB accepted Rio Gov. Anthony Garotinho after he left the PDT earlier this year. Sen. José Alencar (wealthy textile manufacturer elected in 1998) left the PMDB due to internal disputes and is being courted by the PPS, PT, PDT and PL. He probably has joined the PL that is leaning toward support of Lula in 2002. Lula would like Alencar as his running mate. The mineiro senator has nothing to lose, as his 8-year mandate ends in 2006. The PDT, PL, PPS, etc. waited until the last minute for Itamar Franco's decision - that was, in the end, to remain in the PMDB.

Paraná - Senators Osmar and Álvaro Dias (brothers) have left the PSDB because of pressures to remove their names from a Senate petition calling for a CPI to investigate corruption in the FHC government. A past governor (1987-1990), Álvaro (mandate until 2006) has joined the PDT and will run for governor. Osmar will run for reelection in 2002 with the PPS.

Espírito Santo - As reported here, Gov. José Ignácio was elected by the PSDB in 1998 but left the party (just prior to his expulsion) earlier this year amid accusations of massive corruption and impeachment threats in the state legislature. Now he has joined the PMDB. On 02 Oct., the national PMDB executive committee voted to reject this uncomfortable "joiner". This last minute rear guard action secured Sen. Gerson Camata (who had left the PMDB for the PSDB) and his popular wife Dep. Rita Camata (who had joined the PPS) within the PMDB-ES.

Ceará - Popular governor Tasso Jereissati (PSDB) can not run for a third term and is a pre-candidate for President in 2002. Sen. Lúcio Alcântara has the convention votes to become the tucano candidate for governor. Sen. Sérgio Machado, PSDB floor leader in the Senate has switched to the PMDB in hopes of running for governor in 2002.

Brasília - In May this year, Sen. José Roberto Arruda (PSDB) was forced to resign his mandate because of his dubious role in the scandal regarding the downloading of the list of how senators voted on the Luiz Estevão vote in June 1999. He left the PSDB and has now joined the PFL and will run for federal deputy. This move has provoked some shifts in the pre-candidate articulations in the PFL-DF.

In an effort aimed at deflecting defections to the PPS, reportedly Pres. Cardoso has (successively) offered the still vacant Ministry of National Integration (after Sen. Ramez Tebet left to become Senate President) to Senators José Fogaça, José Alencar and Gerson Camata.

1.3 - Lula in Europe

After a long meeting with the French premier Lionel Jospin in Paris, where the elections of 2002 (both in France and in Brazil) were discussed, Lula explained that his PT strategy of building party alliances would be similar to the PSF. The PT's alliance policy may include the PL and its "new convert" - Sen. José Alencar (see Item 1.2) may become Lula's running mate. The PT "tendencies"[factions] more to the Left (that were defeated by Lula's centrist coalition in recent internal party elections has urged "caution" re a coalition with the PL.

While reiterating that the US is an important trade partner for Brazil, Lula criticized NAFTA for its heavy pressures in favor of FTAA, stating that Brazil should only begin to discuss this regional economic bloc after 2005, and that Mercosul should negotiate a concrete trade agreement with the EU.

On 03 Oct., Lula met with Italian Foreign Minister Renato Ruggiero (a former socialist who began his diplomatic career in Brasil). Later he met with representatives of the Party of the Democratic Left (PDS, ex-PCI) - Piero Fassino, Walter Veltrone (Mayor of Rome) and Pietro Folena. The following day, Lula met with former Prime Minister Massimo D'Alema.

1.4 - Chamber Approves new Code of Ethics

On 3rd Oct. the Chamber of Deputies approved its own code of ethics, and will constitute its Ethics Committee next week. Until the accusations against Sen. Luiz Estevão (PMDB-DF) last year, the Senate did not have an Ethics Committee, but since then the latter has been very active - investigating ACM. Sen. Arruda and now Sen. Jader Barbalho.

The Code finally passed by the Chamber is a very weak, watered down version of the original proposal that in essence changes very little regarding the status quo. Individual citizens can bring accusations against deputies to the Chamber, but an investigation will only be installed if the latter have concrete evidence of wrongdoing. The Chamber Ethics Committee will not have the same powers and prerogatives of its Senate counterpart. The Senate committee reports directly to the Senate governing board, but the Chamber ethics committee will have no decision powers; rather it reports to the Chamber CCJ that retains the initiative to start investigations. So expect no changes from the current status quo of total immunity for deputies (except for cases with blatant criminal charges; murder, for example).

1.5 - Three Cardoso Aides Resign

As reported here earlier, the Director-General of the ANP, David Zylbersztajn (former Cardoso son-in-law) has left his position and may become a PSDB candidate for deputy in Rio. On 3rd Oct., the government's key person managing the crash program to construct new gas turbine power units, Delcídio do Amaral Gomez, resigned his position as Director of Gas and Energy at Petrobrás, joined the PT and will become a candidate for the Senate from Mato Grosso do Sul. The third resignation was former deputy Luiz Carlos Santos who left the Presidency of Furnas S.A. to become a PFL candidate for deputy from São Paulo.

1.6 - Tereza Grossi Forced out, Again

Following the Senate investigations of Brazil's banking system, the CPI called for the indictment of Ms. Tereza Grossi and several other Central Bank employees, and even accused her of lying under oath to the Senate, regarding the BC's role is assisting (a direct transfer of US$ 1.6 billion to two tiny "sick" banks in Jan./1999, in the wake of the bungled devaluation/float of the Real). Her comeback was effect by FHC who appointed her the first woman Director at the BC, and then proceeded to ram the appointment down the Senate's throat, forcing her confirmation by the constrained pro-government party alliance. Last year, she was suspended for a few days by a court injunction only to be reinstated by a higher court. Again, on 3rd October she was forced out of her position by a court order issued by the 22nd Federal Circuit court in Brasília. The judge also broke her bank secrecy to facilitate the investigation and froze all assets, along with several other accused - Claudio Mauch, Demósthenes Madureira de Pinho Neto, Francisco Lopes, Alexandre Pundek Rocha, Maria do Socorro de Carvalho, and banker Salvatore Alberto Cacciola. This time, it will be more difficult for a higher court to restore Ms. Grossi to her post, because the evidence amassed is much more voluminous.

1.7 - Results of PT Election

The results of the PT's internal election held on 16th Sept. were made public last week. Lula's moderate group (Articulação) led by Dep. José Dirceu (SP) received 55.55% of the votes cast and avoided a 2nd round of voting and elected 42 of the 81-member National Party Directorate and 12 on the 21-member National Executive Committee. The PT Left wing achieved only 34% of the vote. Raul Pont (RS) placed 2nd with 17.23% of the vote, in the party's first ever direct internal elections.

II FOREIGN RELATIONS & TRADE

2.1 - Brazilian "Shoot Down" Authorization?

In 1998, the Brazilian Congress passed and Pres. Cardoso sanctioned a law that allows the President to authorize the shoot down of unauthorized aircraft that invade Brazilian airspace and do not heed commands from FAB planes to land immediately. Since then, Pres. Cardoso has hesitated in the final "regulation" of this so-called "shoot down law". This "regulation" is the exclusive prerogative of the President.

The US had always been against a Brazilian "shot down law" (although similar action by then Pres. Fujimori was "tolerated" because Peruvian drug traffic by air virtually ceased), but the Brazilian government feels that after the 11th Sept. terrorist attacks the US position has changed. Last week, Pres. Bush authorized USAF commanders to order shootdowns without consulting the Commander-in-Chief. Brazil held the regulation of the shoot down law in abeyance due to veiled threats from the Eximbank (that financed the Sivam system) to suspend financing.

Military analysts observe that ever since the first Sindacta (flight control) system was installed in Brazil in the early 1970s, the FAB had authorization to shoot down unauthorized/unidentified planes. In 1982, during the Malvinas/Falklands war, an intruding RAF Vulcan plane was intercepted by two FAB F-5Es off the São Paulo coast and would have been shot down had the pilot not requested permission for an emergency landing.

2.2 - FAB Procurement Postponed

Those firms interested in bidding on the FAB US$ 700 million procurement for new jet fighter planes were to submit there proposals by 01 Oct. The final date has been postponed to 16th Oct., because some firms needed more information regarding the required technology transfer partnership with the FAB. Boeing (F-18) has withdrawn from the competition, and six other firms remain: Alenia Aeropazio (Eurofighter), Lockheed Martin (F-16), Rac-Mig (Mig-29), Rosoboronexport (Sukhoi-27), Saab-BAE Systems (Grippen), and Dassault-Embraer (Mirage 2000-BR). In another procurement, reportedly the FAB will spend up to US$ 3 billion on diverse models of Embraer aircraft.

2.2.1 - Déjà Vu, Piranha Missile?

The FAB is testing an updated "intelligent" version of the "Piranha" missile that caused so many problems during the Gulf War in 1991. Scrapped by the Collor government in early 1990, the retired FAB officers and civilians involved in the project packet up their designs and diskettes and move to Baghdad at the invitation of Sadam Hussein to produce an Iraqi version of the missile. Their presence in Iraq in Jan./1991 was very embarrassing for Brazil, produced acid criticism in the US Congress, and prohibited any Brazilian "participation" in the gulf War.

Now, ten years later, the Piranha has been resuscitated by the FAB with a development contract with Mectron and renamed the "MAA-1". Mectron is a firm organized by five ITA engineers and has a US$ 20 million contract to produce some 100 of these air-to-air missiles. Mectron is also developing a laser-guided, anti-tank missile (MSS-1.2) similar to the US "Tow" and the Swedish "Bill".

2.3 -Trade Balance Brazil's

trade balance presented a surplus of US$ 594 million in September - US$ 4.755 billion in exports and imports of US$ 4.161 billion. This was the second largest trade surplus since the US$ 656 million posted in Oct./94 and US$ 625 million in Aug./01 (the latter "inflated" by the return of three leased aircraft at US$ 214 million; no aircraft were returned in Sept./01). However, both figures declined steeply vis-à-vis August - exports were down by 17% and imports down by 18.5%. One indicator of a decline in Brazil's investments in local industry was a decline of 5.6% in imported capital goods.

Despite the "euphoria" regarding the Sept. trade surplus, there is much concern regarding the decline of manufactured exports that were down by 11.6% vs. Sept./2000. Airplane sales were down 23.2% and sales to the US by 4.6% and to Argentina by 39.2%. The AEB (Assoc. of Brazilian Exporters predict that exports to Argentina will continue to decline at the rate of US$ 100 million per month in Oct., Nov. and Dec. In 2001, Embraer will deliver 40 aircraft less than expected - a loss of US$ 700 million for Brazilian exports.

2.3.1 - Brazil: Second Largest US Trade Surplus

In accordance with US Dept. of Commerce data analyzed by the Brazilian Embassy in Washington, in the 1996-2000 period the US accumulated a trade surplus of US$ 18.696 billion with Brazil surpassed only by Australia - US$ 34.664. Amb. Rubens Barbosa concluded "in spite of its enormous trade surplus with Brazil, the US still insists on penalizing Brazil with its protectionism barriers. Some 60% of all Brazilian exports to the US are affected, one way or another." A recent IMF study concluded that this situation had a negative impact on Brazil's GDP growth in the 1990s.

2.4 - Oviedo Exile Denied

On 04th Oct., Justice Minister José Gregori announced his decision not to concede the status of "political exile" to Paraguayan General Lino Oviedo, who awaits the STF decision regarding the extradition request from the Paraguayan government. He will remain under house arrest at the home of his cousin in the Lago Sul neighborhood in Brasília.

III REFORMS

3.1 - Labor Legislation Reform

Taking full advantage of Brazil's economic recession that was further aggravated by a deepening of the world economic decline following the 11th Sept. terrorist attacks in the US, Labor Minister Francisco Dornelles (PPB-RJ) began articulating modifications in Brazil's CLT labor legislation, most of which dates from the Vargas reforms in the 1930s and 1940s. Basically, the new legislation would "flexibilize" many labor guarantees via collective bargaining between labor and capital - directly - thus bypassing the labor court system. The argument is that Brazil needs to reduce labor costs to become more competitive on world markets (Argentina passed similar legislation near the end of the Menem presidency).

Although the package has yet to be presented to Congress, the President of the Chamber Labor Affairs Committee Dep. Freire Junior (PMDB-TO) has already designated the reporter - Dep. José Múcio (PSDB-PE). PFL floor leader Dep. Inocêncio de Oliveira (PE) stated that this measure would be deliberated only after the Oct./02 elections.

IV PRIVATIZATION

4.1 - STJ Annuls Embratel Fine

On 01 Oct., the STJ reversed a decision by the TRF 2nd region and annulled an R$ 19.9 fine that had been levied against Embratel [read: MCI] resulting from the privatization in July/98.

4.2 - Paraiban

The bank of the state of Paraiba will go to auction on 08 Nov. at the BV-RJ, with its minimum price set at R$ 52.817 million. Four bidders are pre-qualified: Bradesco, Banco Itaú, BGN and ABN Amro. With 275 employees, 16 branches, 6,754 accounts, and net assets of R$ 26 million, Paraiban is a relatively small bank. The next on the list of the 7 federalized state banks to be sold is BEG (Goiás), that should be auctioned off in December.

V THE ECONOMY

5.1 - Accounting "Magic" Improves Brazil's GDP

In mid-August, when IBGE reported that Brazil's GDP growth was only 0.79% in the 2nd quarter, many analysts were skeptical, and the FHC economic team was furious. The latter ordered IBGE "back to the drawing board" and finally, after some very embarrassing mea culpas by Brazil's until then prestigious statistical gathering unit, the figure was revised upward to 1.82%. This change corrected GDP growth for the 1st semester from 2.49% to 3.12%.

5.2 - Brazil's Risk Factor (S&P)

On 02 Oct., the New York based risk analysis firm, Standard & Poor's classified Brazil among the "three most vulnerable" nations in Latin America (together with Panama and Costa Rica), stating that Brazil would need US$ 80 billion in external financing in 2002. Brazil's risk factor was the 5th highest on S&P's scale at 1,192 points - surpassed by Nigeria (2,041), Argentina (1,687 and 1,842 on 4th Oct.), Ecuador (1,556) and the Ukraine (1,518).

5.3 - "Black October" 2001?

There are ripples of apprehension and foreboding among some financial market analysts in Brazil regarding negative perspectives for Brazil - with a sequence of "troublesome" dates: 12th - a Brazilian (and US holiday); 13th-14th - elections in Argentina; 15th 60-day stock option deadline; 16th-17th - Copom meeting; and 17th - deadline for Bovespa futures options. Analysts in New York feel that October will be a very unstable month for the NYSE.

5.4 - Reserves at US$ 40 bi

On 28 Sept., Brazil withdrew US$ 4.7 billion from the US$ 15.6 billion credit line from the new IMF agreement and its reserves increased to US$ 40.069 billion. It is possible that this month Brazil may recover some of the US$ 3.4 billion "lost" in the so-called "polonetas" scandal in the early 1980s. If so, Brazil's reserves may increase even more. In Sept., in an effort to repress the US$ exchange rate, the BC sold R$ 15.720 billion in bonds tied to the exchange rate.

5.5 - Banco Itaú buys LAM

On 3rd Oct., Banco Itaú purchased the R$ 5.2 billion portfolio of investment funds administered by LAM (Lloyds Asset Management of Lloyds TSB. Plus another R$ 1.3 billion in "Private" investments of preferred clients (net worth of over R$ 1 million). Sources close to the negotiations report that the price was "around R$ 200 million". This acquisition boosts Itaú into 2nd rank among Brazilian banks regarding assets with R$ 48.3 billion, just ahead of Bradesco (R$ 46.6 billion), and behind the Banco do Brasil (R$ 56.4 billion).