Focus on Brazil

SITREP from Brazil – is a coup d’etat next?

Vineyard of the Saker,

11 May, 2015

This SITREP was sent to me by “Kubla Khan” from Sao Paulo:

On the night of July 30 the “Lula Institute”, which was created and is chaired by the leftist leader known internationally, Luiz Inacio Lula da Silva, was attacked by a homemade bomb. The same Lula, elected twice president of the republic, the same Lula that through aggressive social policies, drew 41 million people out of poverty line, in the program to combat hunger and social inclusion regarded as the greatest of modern times.

This is, so far, the apex of the climate of hate fomented by the great majority of the Brazilian media, along with the opposition parties, eager for a power outlet through the Impeachment of President Dilma Rousseff.

In an unprecedented campaign, the president has been the target of daily, uninterrupted attacks, led by the conservative press arms, and through social media, especially Facebook. The so-called “panelaços” – (demonstrations in which any statement of president in TV, people leave at the windows and the sidewalks banging pots), are also a constant, which along with some demonstrations of large-scale, where thousands of people, most of middle and upper class, took to the streets in protests carefully crafted, make the President has the worst approval ratings in the history of the country, including beating the indexes of former President Fernando Collor, months before being ousted by impeachment, in 1992.

According to the excellent article by William Engdahl, US, engineer and jurisprudent (Princeton, USA, 1966), a graduate degree in comparative economics (Stockholm, Sweden-1969) in one of the newspapers most sold in the US, the New Eastern Outlook – “The reason why Washington wants to get rid of Rousseff is clear. As president, she is one of the five BRICS heads who signed the formation of the Development Bank of BRICS, with an initial authorized capital of $ 100 billion and a reserve fund of another 100 billion dollars. It also supports a new international reserve currency to complement and eventually replace the dollar. ”

Also according to the journalist: “During the rough campaign between Rousseff and Aécio Neves (the opposition candidate), the opposition began to spread rumors that Rousseff, who until then had never been linked to corruption so common in Brazilian politics, would be involved in a scandal involving the state-owned oil giant, Petrobras. In September, a former director of Petrobras claimed that Rousseff government officials had received commissions on contracts signed with oil giant, these committees which then would have been used to buy congressional support. Rousseff was a member of the board of directors of the company until 2010.

Now, on November 2, 2014, just days after the hard-fought victory for Rousseff, the largest US financial auditing firm, “Price Waterhouse Coopers” refused to sign the financial statements for the third quarter of Petrobras. The PWC demanded a more thorough investigation of the scandal involving the state-run oil company.
The Price Waterhouse Coopers is one of the audit firms, tax consulting and corporate and more tainted business scandals in the United States. She was involved in 14 years of covering up fraud in the AIG insurance group, which was at the heart of the US financial crisis of 2008

Also according to Engdahl: “With the deepening of relations between the Rousseff government and China as well as with Russia and other partners of the BRICS, in May 2013, the US vice president, Joe Biden, came to Brazil his agenda focused on the development of gas and oil. He met with President Dilma Rousseff, who had succeeded his mentor Lula in 2011. Biden also met with leading energy companies in Brazil, including Petrobras.

Although little has been said publicly, Rousseff declined to reverse the 2009 oil law in order to adapt it to the interests of Biden and Washington. Days after Biden’s visit came the revelations of Snowden on the NSA, that the United States was also spying Rousseff and senior officials from Petrobras. She was furious, and that September, denounced the Obama administration before the UN General Assembly in violation of international law. In protest, she canceled a scheduled visit to Washington. After that, relations United States-Brazil suffered severe cooling.

Before Biden’s visit in May 2013, Rousseff had a popularity rate of 70 percent. Less than two weeks after the visit of Biden to Brazil in nationwide protests called by a well-organized group called “Movement Free Pass”, relating to a nominal increase of 10 percent in bus fares, they led the country virtually to a standstill and they became very violent. The protests bore the mark of a typical “Color Revolution” or destabilization via Twitter that Biden seems to follow wherever it presents itself. Within weeks, the popularity of Rousseff fell to 30 percent.”

On March 17, 2014 began an overt operation by Federal Judge Sergio Moro, setting off a wave of arrests of politicians and builders contractors, unprecedented in the history of the country. Key figures and presidents of the largest construction companies in Brazil, as well as figures from the first and second levels of the PT (Party of President and Lula) have been and are being targeted by this operation. Now we must remember that corruption is endemic in the country, and although similar political situations of other parties, including the opposition key figures such as the president of the Chamber of deputies and politicians from the main opposition party, the PSDB, are involved in the same crimes, no action is taken against them – even when charged or cited by the prisoners in winning denunciations system, its processes are filed, thus demonstrating that the target of operations is not fighting corruption, but rather discredit the PT and all circle of power around the president, and obviously derail Petrobrás as a state enterprise.

Note: a draft law presented by opposition senator and former candidate defeated by Lula in former presidency elections, José Serra (PSDB-SP), which predicts the end of compulsory Petrobras as the operator and have at least 30% share in the consortium created for the pre-salt exploration, paving the way for the subdivision of operations to foreign companies, mainly from the United States.

Even in the economic, earlier this year, the President was forced to take unpopular measures at the beginning of his second term, the so-called Fiscal adjustments, to mitigate the effects of the global economic crisis, that through enormous effort of his government, just now beats to the country’s ports. These measures – increase in public rates, spending cuts in social programs, and curbing demand for luxury goods, though necessary, were taken soon after an election win with a small margin of votes, which caused more discontent in low class populations, mainly in the North and Northeast, the poorest and most decisive in the victory of president in the 2014 elections.

But let’s see if the numbers of the Brazilian economy justify all this revolt of the population:

Inflation target set for the year: 4.5%
Unemployment (first quarter of year): 7.9%
GDP: R $ 5.52 trillion

So we note that, despite living a time of downturn in the economy, the country is far from a state to justify such indignation and anger by society. Also draws attention the fact that despite the price increases, the population keeps going fiercely shopping, including luxuries, which has values ​​that do not make it possible to purchase in a state of economic chaos.

Another wave of rumors give hypothesized the resignation of the president, an unlikely decision, especially if we take into account his recent statements in favor of the votes obtained by free elections, and its history as a prisoner tortured by the Brazilian military regime, in the 60s – “born in middle-class family, he became interested in socialism in their youth, shortly after the military coup of 1964 and then joined the armed struggle of the left: he became a member of the National Liberation Command (HILL) and later the Vanguard Armada Revolutionary Palmares (VAR-Palmares) – both organizations supported the armed struggle against the military regime. He spent nearly three years imprisoned (1970-1972): first by the military Operation Bandeirante (OBAN), where he underwent torture sessions, and later by the Department of Political and Social Order (DOPS)”. (Source Wikipedia)

So the country follows in suspense, and under the ghost two demonstrations scheduled for this month: on the 16th – where the opposition calls for impeachment of the president, and on the 20th – where the popular movements hold demonstrations in support and reparation to the president.

Just As Brazil Hits Rock Bottom, Things Are About To Get Even Worse

Zero Hedge,

11 August, 2015

For anyone who might have missed it, Brazil is in trouble.

The country is "at the center of a triple unwind of EM credit, China’s leverage, and US monetary easing" (to quote Morgan Stanley) and as Goldman recently pointed out, faces a stagflationary nightmare.

Last quarter, Brazil suffered through the worst growth-inflation mix in over ten years. As Goldman put it, "since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015."

And then there's the twin deficit problem. Here's Goldman again:

Over the last 11.5 years, we cannot identify a month with a strictly-worse fiscal-CA deficit outcome than that of May-15 (lower left quadrant is empty). In fact, at 7.9% of GDP the fiscal deficit is now the widest it has ever been since Jan-04, and there were only a few months (5 out of 137 months in the sample) were the current account deficit was marginally wider than currently.

Meanwhile, as we mentioned on Monday, Dilma Rousseff is now the most unpopular democratically elected presidentsince a military dictatorship ended in 1985, with an approval rating of just 8%. In a recent poll, 71% said they disapprove of the way Rousseff is doing her job... and two-thirds would like to see her impeached. Here’s Bloombergsumming up the situation: 

To be sure, the president faces a host of challenges this month, not least of which is a nationwide protest planned for Aug. 16.

The country’s audit court also must decide whether the government broke the fiscal law by doctoring budget results last year. A ruling against the government could provide the legal foundation to start impeachment hearings, opposition lawmakers say. Her administration says previous presidents used the same practices.

Investors are concerned that the political instability will push Brazil into a deeper recession and make it increasingly vulnerable to a sovereign-credit downgrade. The real has depreciated 8.1 percent in the last month, the biggest decline among 16 major currencies tracked by Bloomberg.

Given all of this, just about the last thing Brazil needed was for China to officially enter the global currency wars, which is of course exactly what happened overnight. Our response:

Biggest immediate loser from China's devaluation: Brazil

— zerohedge (@zerohedge) August 11, 2015

And the response from Brazil's trade ministry (via Reuters):

Brazil's Trade Minister Armando Monteiro on Tuesday said China's decision to devalue the yuan could hurt the country's manufacturing exports. 

So what lies ahead for Brazil given all of the above? Well, further BRL weakness - or at least according to Goldman. Here's more:

We are moving our BRL forecasts to show further downside – we expect $/BRL to reach 4.00 in 12 months (relative to 3.55 previously). A weaker BRL is part of a necessary adjustment to address the macro imbalances in Brazil; and the combination of a weak and increasingly back-loaded path of fiscal adjustment and a central bank that appears to be done with tightening policy for now suggests that the exchange rate is likely to bear more of the overall burden of absorbing the impact of the commodity price downdraft, restoring competitiveness and correcting the current account deficit. 

Brazil stands at a crossroads – both roads involve currency depreciation. The combination of significant macro challenges (economic contraction, elevated inflation and large fiscal and current account deficits) and a deteriorating political and institutional backdrop means that Brazil stands at a pivotal crossroads. One road involves the risk of a further deterioration in the political backdrop morphing into a full-fledged governability and institutional crisis (potentially including the departure of key policymakers) and a further deterioration in investor (and rating agency) confidence, with an associated additional hit to an already contracting economy. The other road involves a potential stabilisation in the political picture, which in turn would provide the authorities with room to undertake necessary short- and medium-term fiscal consolidation measures, coupled with monetary easing further down the line. In either case, we think the BRL is likely to depreciate further because it is hard for us to see a route back to a more balanced set of macro outcomes in Brazil that do not involve currency weakness. Along the first road, the depreciation is likely to be sharper and disruptive, with scope for overshooting and an eventual rebound; the alternative scenario would likely involve a grinding, more controlled move, potentially encouraged by policymakers.

Macro imbalances in Brazil are large, the worst in almost a decade...We have developed a simple scoring algorithm to assess the scale of internal (inflation relative to target) and external imbalances (current accounts relative to sustainable levels) and, as Exhibit 1 shows, in Brazil these imbalances are at their widest combined level in a decade. The fiscal deficit at -8.1% of GDP is also at its widest in more than 20 years, with the combined twin deficits now tracking at a disquieting 12.5% of GDP.

Of course as we said late last month, the simple fact is that whether it's China, runaway stagflation, or simple politician greed and corruption, Brazil has passed the recession phase and its economy is in absolute free fall and against a backdrop of an escalating currency war (which the country's most important trading partner has just officially entered), unattainable fiscal targets, and protracted weakness in commodity prices, the path to stabilization and rebalancing is anything but clear, but what does seem virtually certain is that Brazil has a date with junk status in the not-so-distant future. 

And on cue, just moments ago:

• BRAZIL CUT TO Baa3 FROM Baa2 BY MOODY'S; OUTLOOK TO STABLE

So that's one step up from junk for Moody's and one step from junk for S&P - it shouldn't be long now, because no matter what Moody's says, there isn't anything "stable" about this situation.

We suppose the only lingering questions are whether Rousseff will be impeached and whether economic decay, a dangerously unstable political situation, and problems of a more, shall we say, "putrid" nature, will conspire to make Rio a veritable ghost town for next summer's Olympic games.

Then again, this young lady doesn't seem particularly concerned...

A major drought and water crisis in the largest city couldn't contribute to economic peoblems, could it? lol

Brazil's water crisis is so bad that the army is staging simulations of a mass uprising at the local water utility

Business Insider,

10 August, 2015

Here’s a scenario that seems plausible enough: The Brazilian megacity of São Paulo, currently dealing with Brazil’s largest water crisis in 40 years, continues to experience severe drought over the next several months.

The crisis deepens, and soon, some residents lose access to water altogether. 

The next step: a riot or crowd-driven attack on Sabesp, the local water utility.

It’s the kind of desperate measure that seems more like a distant post-apocalyptic situation for other drought-ridden places like California, but as one São Paulo water activist recently discovered, the Brazilian army is actually preparing for this possibility.

“I looked at the emergency plan from the government. They don’t know how we’ll save water,” explains Martha Lu, a water activist, in an interview with Tech Insider. 

“The army is in Sabesp doing an exercise to prepare for an invasion from the people.”

This past May, Lu teamed up with a journalist from Spanish newspaper El País to visit Sabesp while the army was involved in one of its riot simulations. You can read their full report (in Portuguese) here.

Sabesp told Lu and journalist Maria Martin that the army has been doing similar exercises for 15 years, but former employees of the water utility contradicted that, saying that they had never seen anything like it.

On the day that Lu visited Sabesp, approximately 70 army members were scoping out the utility’s readiness for an uprising. One official said that 30 men with machine guns were stationed in the lunchroom.

São Paulo has also reportedly sent public officials to the US to take lessons from SWAT leaders on how to deal with the water crisis.

Already, people in the city are experiencing water cuts that last from hours to days at a time. Prior to the drought, the city’s water supply provided 8,700 gallons of water each second. That’s now down to 3,563 gallons per second. As a World Bank official told NBC News, “São Paulo’s current drought emergency is both unprecedented and unpredicted.”

The rest of the world should take note: the way that São Paulo residents and officials react if the drought continues will be a preview of how things will go elsewhere — in California (and other parts of the U.S.), China, India, France, and every other place where that the water table is dropping — without drastic water conservation measures.