Analysis: Rousseff's bet - Brazil has atoned for economic sins

Fri Jan 4, 2013 9:35am EST
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By Brian Winter

(Reuters) - President Dilma Rousseff's big bet in 2013 is that Brazil has matured enough to escape from a financial straitjacket that markets have imposed since the 1990s, when inflation soared beyond 2,000 percent and the state was virtually bankrupt.

Since that chaotic era, Brazil has played by a more conservative set of rules than most modern economies - with laws that tightly regulate government spending, interest rates exceeding 40 percent on consumer loans, and other rules and practices designed to reduce financial risks and ensure the bad times don't return.

Now Rousseff, a left-leaning economist who likes to make key financial policy decisions herself, is boldly wagering that Brazil is ready to turn the page.

This year she plans to loosen decade-old rules on public spending; ensure that benchmark rates stay at their current record low of 7.25 percent, even if the economy accelerates; pressure banks into lending more; and force investors to accept lower returns on infrastructure projects and other investments.

The policies amount to a bet that Brazil's government has earned enough credibility over the past two decades, and the economy has undergone sufficient structural change, to remove some of the safeguards that protected it from disaster, but may have also restrained growth in recent years.

If Rousseff is right, her moves could stir the world's sixth biggest economy from its recent doldrums and back on course for growth of 4 percent-plus in 2013 and in years to come.

If she's wrong, some of Brazil's old ghosts - high inflation, low growth and general financial disorder - could rear their heads again.

While a meltdown is unlikely, Brazil could slip further behind its peers in Latin America and the BRICS group of major emerging markets - which also includes Russia, India, China and South Africa - and Rousseff's re-election for a second term in 2014 could be in jeopardy.   Continued...

Brazil's President Dilma Rousseff speaks during breakfast with reporters at the Planalto Palace in Brasilia December 27, 2012. REUTERS/Ueslei Marcelino