Lula Wins Election, Loses Argument With Math

Brazil’s Markets Fall 13.9 Percent as Ballot Boxes Close and Brokerage Accounts Follow

BRASÍLIA, Brazil — President Luiz Inácio Lula da Silva won a fourth, nonconsecutive term on Sunday, October 25, proving that Brazil can settle a presidential election without settling the national accounts. By Monday, the country’s stock market had fallen 13.9 percent, and its currency had dropped 8.1 percent against the dollar. The ballot boxes had closed. Apparently, so had several brokerage accounts.

Lula Beats Flávio Bolsonaro by 4.4 Million Votes

Lula defeated Senator Flávio Bolsonaro by roughly 4.4 million votes, according to Brazil’s electoral authorities. That is a solid electoral margin, although economists report that voting for a larger economy does not automatically produce one.

The distinction has baffled political consultants for generations. In campaigning, you add promises. In budgeting, you subtract costs. In governing, you announce a committee to determine who stole the subtraction sign.

Brazil’s Public Debt Reaches 82.9 Percent of GDP

Brazil’s gross public debt has climbed to 82.9 percent of gross domestic product. Reuters reports that less than 8 percent of federal spending can be readily adjusted. This is the financial equivalent of taking your spouse to dinner, discovering that 92 percent of your income is already committed, and ordering dessert because technically the waiter has not brought the check.

A government balance sheet has three main ingredients: revenue, spending and the increasingly adventurous explanation connecting the first two.

Lula’s Supporters Point to Poverty Reduction and Social Programs

Lula’s supporters have a legitimate reason to celebrate. They point to his social programs, wage policies and record of poverty reduction. The argument is that a government is not merely a spreadsheet with a flag attached. Fair enough. Unfortunately, a spreadsheet is also not impressed by speeches, fireworks or the moral superiority of a really enthusiastic campaign volunteer.

Interest Rates at 13.75 Percent Make Borrowing Brutal

Brazil’s benchmark interest rate stands at 13.75 percent, according to the Central Bank of Brazil, while annual inflation was reported at 4.6 percent. Borrowing money at those rates can make purchasing a modest family car feel like acquiring a privately owned space program.

In the Bohiney Institute’s kitchen-table experiment, researchers placed two hundred reais in a cookie tin, promised three hundred reais in benefits and waited for economic growth. The tin produced no additional currency but did attract a nephew who wanted to run for Congress.

How to Fund Social Protection Without Raising Borrowing Costs

The real public-policy question is not whether social protection has value. It is how to finance it without raising borrowing costs for the same families the protection is meant to help. Even a well-designed benefit becomes less helpful when groceries, mortgages and business loans swallow the gain.

Finance Minister Dario Durigan Promises a Primary Surplus

On Monday, Finance Minister Dario Durigan spoke of pursuing a stronger primary budget surplus. A primary surplus means government revenue exceeds noninterest spending, an achievement politicians often describe with the excitement ordinary people reserve for finding an old parking receipt.

What Investors Want to See From Brasília

Investors will want details, not slogans. A credible plan might include transparent spending priorities, better tax collection and clearer debt targets. It must also survive a Congress that has its own shopping list. The International Monetary Fund has been tracking the numbers for some time and has not been invited to the party.

As the celebrations continued, Brazil faced an inconvenient accounting truth: a majority can elect a president, but it cannot elect a new multiplication table.

The nation’s accountants, having exhausted their calculators, were last seen asking whether the national anthem could be played in a minor key.

Evidence Entered Into the Record

Exhibit A: Fine Print, Campaign Flyer, Page 14

Benefits payable subject to the availability of money. The Government assumes no liability for arithmetic, compound interest or the remaining 92 percent. Promises may go down as well as down. Offer void in open markets.

Exhibit B: One-Star Review, Posted Monday by a São Paulo Broker

★☆☆☆☆ Would not recommend this election.

Bought in Friday. Red by Monday. Seller said “fundamentals” were included. They were not included. Tried to return the whole thing to the exchange and was told a circuit breaker applies. Staff were polite. The cookie tin at my mother-in-law’s house is more reliable and has never once dropped 13.9 percent.

Exhibit C: Dispatch Log, Trading Floor, Monday

9:31 a.m. – Market opens. Traders in good spirits.
9:34 a.m. – Index down 6 percent. Trader asks whether the screens are stuck on red or that’s just the color now.
9:47 a.m. – Circuit breaker trips. Floor goes quiet. Somebody passes around the donuts.
10:17 a.m. – Trading resumes. Index finds a way to go lower.
11:02 a.m. – Real hits 8.1 percent down. One trader starts checking flights to Lisbon. Another is already in Lisbon, by phone.
4:55 p.m. – Close. Everyone agrees the afternoon is the only thing that has ever shown up on time in this building.

Exhibit D: Itemized Invoice, Victory Night and Aftermath

Payment terms: thirty days, or the next election, whichever comes first.

Five Humorous Observations

1. You know you’ve got a debt problem when 92 percent of your budget is already spoken for and your answer is a bigger fireworks show. That’s not a fiscal plan. That’s the guy at the wedding who just found out it’s a cash bar.
2. A circuit breaker is what the stock market has instead of a mother. Thirty minutes. Sit there. Think about what you did.
3. Thirteen point nine percent in one day. I’ve seen smaller drops from a guy who just found out the Wi-Fi at the hotel is a separate charge.
4. “Primary surplus.” That’s where you say you’re doing great by ignoring the interest. Everybody knows somebody like that. Beautiful apartment. Seventeen-page letter from the credit card company.
5. Two hundred reais in a tin, three hundred promised. At least the tin is honest. It just sits there being a tin. It has never once told you it would “revisit the numbers.”

Sources and Further Reading

• Reuters: Investors expect markets to unwind after Lula’s re-election
• Financial Times: Analysis of Lula’s fiscal challenges
• Central Bank of Brazil
• International Monetary Fund: Brazil country page
• B3 Brazilian Stock Exchange