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Argentina and Brazil: Trading Places?

Macri’s election raises hopes of economic revival in Buenos Aires, whereas Brazil’s economic and political crisis deepens.

Rarely have South America’s two largest countries been on such divergent tracks. In one, the election of a popular new leader who pledged to revive the economy while honoring the nation’s past obligations set the stage for a dramatic revival. In the other, a deepening recession and political crisis marked by corruption scandals, polarization and mass protests left many observers wondering if the country could still govern itself.

This is the state of Brazil and Argentina — in 2001–’02. Then, union-activist-turned-politician Luiz Inácio Lula da Silva won the Brazilian presidency by moderating his leftist positions and promising to combine social justice with market realism. He abandoned earlier proposals to repudiate some of the country’s debts; nominated a respected former banker, Henrique Meirelles, to run the central bank; and began putting in place a range of social programs, dubbed the Bolsa Família, that helped lift millions of people out of poverty. Lula’s policies, and the tailwind of a global commodities boom, fueled a decade-long expansion. Argentina, by contrast, seemed to be spiraling out of control. After three years of a punishing recession, bloody riots drove President Fernando de la Rúa from office in December 2001, and the country defaulted on nearly $100 billion of foreign debt and devalued the peso.

Today it’s easy to mistake Argentina for the Brazil of 2002, and vice versa. The election of conservative businessman Mauricio Macri as president on November 22 has raised hopes that the country may finally end its largely self-imposed exile from the global economy and capitalize on its underlying strengths. Macri has vowed to reach a deal with the holdout creditors who rejected Argentina’s 2005 debt restructuring, led by Paul Singer’s Elliott Management Corp., which would enable the country to regain access to the international capital markets. He has also promised to replace the populism and crony capitalism of his Peronist predecessors, Cristina Fernández and her late husband, Néstor Kirchner, and pursue market-oriented policies. The Argentinean stock market has soared by 41 percent in the past two months in anticipation of such changes.

Brazil, meanwhile, appears caught in a vicious circle of economic and political decline. The shock waves from the global commodities bust have been compounded by the fallout from an ever-expanding investigation into a nexus of corruption between state-controlled oil giant Petróleo Brasileiro and politicians. The scandal took a dramatic turn on December 2 with the launch of impeachment proceedings against President Dilma Rousseff, Lula’s handpicked successor, over her presumed implication in the affair. (She served as chair of Petrobras for seven years before running for president in 2010.) The proceedings come at an inopportune time, to say the least. Congressional opposition has already been frustrating Finance minister Joaquim Levy’s attempts to trim the budget deficit, prompting Standard & Poor’s to downgrade Brazil’s debt rating to junk status recently. The country is entering a second year of recession, with output on track to decline by more than 3 percent in 2015. The real has fallen by a third in the past year, and Banco Central do Brasil has hiked rates to 14.25 percent in a bid to contain inflation. “What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression,” writes Alberto Ramos, co-head of Latin America research at Goldman Sachs Group.

The Petrobras affair has intensified since the November 25 arrest of André Esteves, the billionaire founder and CEO of investment bank BTG Pactual and one of the most powerful figures in Brazilian financial circles. Esteves was arrested along with the Senate leader of Rousseff’s Workers’ Party for allegedly trying to interfere with the testimony of a former Petrobras executive who was jailed in January. Esteves has denied the allegations, but the country’s Supreme Court on Sunday granted the prosecutors’ request to hold him indefinitely while pursuing their investigations. Esteves resigned from the bank late Sunday and was replaced by two co-CEOs: Roberto Sallouti, chief operating officer of BTG Pactual, and Marcelo Kalim, the group’s chief financial officer. The bank’s shares plunged 30 percent on the day of Esteves’ arrest, and have eased nearly 5 percent more since then, as of December 1. Investors reportedly pulled more than $1 billion from some of the bank’s liquid fixed-income funds since the arrest.

The corruption scandal is damaging because it undercuts the idea of a new Brazil, which had fueled much of the optimism about the country’s economic revival over the past decade, and because there is no end in sight. The government will be paralyzed by the impeachment proceedings for the next two months at least. Analysts at political risk consultancy Eurasia Group put a 40 percent probability on President Rousseff being forced from office before her term ends, in 2018. The president of the lower house of Congress, Eduardo Cunha, initiated the proceedings only after Workers' Party members called for his removal from office over his alleged involvement in the Petrobras graft. With political leaders focused on saving their own necks, there is nothing approaching a consensus in Brasília on how the affair might end, who can provide real leadership and what policies the country needs to pursue to get its economy back on track.

Yet Brazil’s institutions — its judicial ones, at least — are working. Prosecutors in the southern city of Curitiba stumbled onto the Petrobras kickback scheme while investigating money laundering, and have pursued the evidence diligently into the oil company’s C-suite, the halls of Congress and even to the inner circles of Lula and Rousseff. The president hasn’t tried to shut them down. Protests have been large and frequent but peaceful. If Operation Car Wash, as the investigation is known, deals a lasting blow to a culture of corruption and cronyism, the prosecutors will have done the country a valuable service. That will take time, though. Brazil is a large and fractious democracy, and the affair is unlikely to end any time soon.

In Argentina, President-elect Macri needs to rebuild the country’s institutions after a dozen years of Peronist interference, during which Kirchner and Fernández undermined the central bank’s independence, manipulated statistics to hide rampant inflation and raided private pension funds of $30 billion to cover its deficits.

Macri has gotten off to a good start, nominating a team of technocrats led by Alfonso Prat-Gay as Finance minister–designate to restore order to the economy. Prat-Gay, a former J.P. Morgan economist, succeeded in taming inflation as president of Banco Central de la República Argentina from 2002 to 2004 before Kirchner effectively drove him from office. Macri has also promised to improve relations with the U.S. and cut Argentina’s support of Venezuela because of its record of human rights abuses.

The new leader faces daunting odds, though. The only non-Peronist presidents to lead Argentina since the restoration of democracy — Raúl Alfonsín and de la Rúa — resigned before their terms expired with the country in chaos. And unlike those predecessors, Macri doesn’t enjoy a majority in either house of Congress. His proposed policies of fiscal restraint and the abolition of a complex exchange-rate regime, which implies a big devaluation of the peso, will generate much short-term pain before it delivers any long-term gain.

It’s too early to justify the optimism in Buenos Aires, or to succumb to despair in Brasília. Both countries need to establish sound policies and solid institutional processes to get their economies back on track, and to do so in a global context that’s much harsher than a decade ago. The good news is, there’s no credible alternative. The less good news is that reform in both countries will take time. Here’s hoping that Macri, and political leaders in Brazil, use their time effectively.

This article was updated on December 2 following the initiation of impeachment proceedings.

Follow Tom Buerkle on Twitter at @tombuerkle.

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