Many questions, a few answers

by The Economist, November 25th, 2010.

Dilma Rousseff’s economic team reassures suddenly nervous investors that it will indeed stick to fiscal and monetary rectitude.

In 2002, as Luiz Inácio Lula da Silva, once a firebrand union leader, headed for Brazil’s presidency as the candidate of the left-wing Workers’ Party (PT), foreign investors pulled out and rich locals sent their savings abroad. But in the weeks after he was elected, Lula quickly settled nerves. He named Henrique Meirelles, a former international banker, to run the Central Bank. And his pick for finance minister, Antônio Palocci, announced a tighter fiscal policy even before Lula took office. This year as Lula’s protégée, Dilma Rousseff, dominated the election campaign, the continuation of market-pleasing macroeconomic policy was widely taken for granted. In her victory speech on October 31st Ms Rousseff promised to cut taxes, rein in public spending and control inflation.

But some among the bankers and business people in São Paulo, Brazil’s financial capital, have become increasingly anxious for reassurance. The weeks since the election have seen frenzied speculation, leaks and counter-leaks in the media as to who will get what job in the new government. On November 24th came the first appointments—and some soothing messages.

Ms Rousseff is to keep as finance minister Guido Mantega, who has been in the post since 2006. He is from the PT’s “developmentalist” wing, which sees a big role for state-owned companies and government intervention. During the credit crunch he ramped up public spending. As the election approached, the rise in spending continued (federal spending has increased by 27% so far this year), justified as pro-development rather than counter-cyclical. There was also some creative accounting, as government loans were channelled through the National Development Bank (BNDES) to keep them off the books. (continue reading… )