US lauds Brazil's Lula, but angst remains

By Shihoko Goto UPI Senior Business Correspondent www.washtimes.com

     WASHINGTON, Oct. 29 (UPI) -- U.S. officials continued to voice their support for Brazil's incoming president and talk up the country's economic prospects Tuesday, but despite such public optimism, wariness that Latin America's most populous and largest economy could falter continues to keep investors at bay. Top Stories • Israeli Labor ministers resign • Bush meets with Blix • Suspect probed in alien smuggling • Ventura mulls independent substitute • Romania moves ahead • Virginia referendum ties builders, politicians • Parents see tough moral rival in popular culture

     President-elect Luiz Inacio Lula da Silva "is not a (Fidel) Castro or a (Hugo) Chavez," said James Carragher, the State Department's director of Brazilian and Southern Cone Affairs, pointing out that unlike Lula, the Cuban and Venezuelan leaders by constitutionally questionable means.      "We would rather deal with a democratic government any day," he added, speaking as a panelist at a U.S.-Brazil relations conference hosted by the Center for Strategic and International Studies.      His comments echoed those from senior Bush administration officials, including Treasury Secretary Paul O'Neill, who welcomed Lula's victory, at least publicly. Yet, financial markets have reacted tepidly to the election of a new Brazilian leader, as the country's currency remains weak and the stock market continues to languish.      But former U.S. ambassador to Brazil Anthony Harrington brushed off Wall Street's fears that Lula's administration would default on its foreign debts and lead the country into bankruptcy, as has been the case of neighboring Argentina.      "Brazil is undervalued...I am very hopeful for what lies ahead, " Harrington said. He also pointed out that according to a recent U.S. Chamber of Commerce survey, Brazil is the most popular emerging market for U.S. investments, and most companies are likely to keep their investments in the country as the current rate.      To be sure, there is no doubt that the Brazilian Workers' Party leader struck a chord with the electorate, having won last weekend's election with over 60 percent of the votes cast. Lula's drive to become president is also undeniable, given that he had to try four times before finally winning the top spot.      At the same time, however, the former factory worker will be leading a country that struggles with $260 billion in public debt, while over 100 million people continue to live in dire poverty.      The question is how he will address the demands from the left and their social concerns on the one hand, and meet its financial obligations to investors on the other. Many analysts have pointed out that Brazil's public debts have reached unsustainable levels, and that the country will have no choice but to default, or at least considerably restructure, its debts.      Speculations of a debt default sooner or later has led foreign investors to flee Brazilian markets, which has slashed the value of the real by 40 percent in recent months, while interest rates on debts remain above a staggering 20 percent.      Lula himself has attacked the International Monetary Fund as well as the Bush administration earlier on in the campaign trail, suggesting that there was no need for Brazil to meet obligations imposed upon it. In August, the IMF promised to provide $30 billion to the country, the largest sum it has offered to any country at once. But the loans will not be disbursed until next year, when the IMF can better gauge how Lula's government will service its debts.      Harrington suggested that the IMF could consider rescheduling or indeed restructuring some of Brazil's loans, given that the new government will be under considerable pressure both internally and externally to meet high expectations.      "It's in our interest, both the United States and Brazil, for Lula to succeed," Harrington said, adding that there was "room for realism...to note the political and social circumstances of a struggling leader."      Certainly, domestic demand for reform will be just as high, if not higher than demands from Brazil's creditors. Addressing issues such as increasing the minimum wage will be critical for Lula's political success, but at the same time, such moves could hurt hamper Brazil's economic prospects, particularly in attracting foreign investors, who are often lured by the country's cheap labor costs.