Thursday, February 11, 2010

Is Greece Tomorrow's Brazil?

Journalist Josue Leonel had a great piece on Brazilian newspaper O Estado de Sao Paulo. While developed nations can be considered doomed as there will be no real growth here for many years, the growing developing economies also have their share of issues which must be acted upon by governments. If not, many other Greek tragedies will unfold. Something to keep in mind.

"One of the novelties of the crisis unfolding since 2008 is that it changed sides compared to ones in the past. In the Asian crisis of 1997, for example, the epicenter was Asia and the contagion hit especially developing countries, recently baptized as "emerging", such as Brazil. This time, geography has changed. The epicenter of the crisis was the U.S. and the impact was harder in the rich countries of Europe and Japan, and peripheral countries in this area, like those of Eastern and Southern Europe, are the hardest hit.

More recently, Greece has emerged as an economy threatened with collapse, while other representatives of "old Europe", as Portugal, Spain and Ireland are also the target of speculators. Brazil seems to navigate through less turbulent waters. Thanks in part to the maturity of structural reforms particularly in the 90's and to the cumulative effect of 20 years of economic liberalization, but also because the country is now the beneficiary of the impulse provided by China, which increased global demand for commodities to a new level and gave the producers of basic commodities a unique position in the game of global forces.

While this current arrangement by the Chinese force prevails, it is possible that the Brazilian economy continues to perform better than the world average. No wonder, therefore, the enthusiasm of large international financiers such as Mohamed El-Erian (Pinco) and Mark Mobius (Templeton) with the opportunities in the South American giant.

It should not be overlooked, however, that many of the shortcomings pointed out by analysts for the countries of southern Europe today are similar to those pointed out by Brazilian experts, especially those of more liberal view of the economy. When figures for Brazil today are compared with those from Greece, the differences are striking, and generally favorable to Brazil. In the current picture Brazil appears much better. When you imagine all the variables defining its evolution, however, is difficult to ensure that the Brazilian economy will not face similar problems in future.

Greece shocks investors with a public deficit of 12.7%, almost four times larger than the nominal deficit of 3.3% registered in Brazil in 2009. This is the current picture and should not change much in coming years in the Brazilian case. However, this apparent fiscal austerity in Brazil has been carried out since the late 90's by a strong increase in taxes and an inflated revenue by economic growth, not the control of expenditures. By contrast, spending on civil service, for example, rose well above inflation in recent years.

As reported on Tuesday the newspaper O Estado de S. Paulo, the public server payroll increased from 4.54% to 5.11% of GDP from 2006 to 2009. While the government talks about limits to the inflation adjustments, new projects in Congress extend the costs. These costs, once approved, become irreplaceable, because the law prohibits wage cuts, while the increase in revenues, as seen by last year's example, has no guarantee that will be repeated in the future.

The budget becomes inertial on the expenditure side, but never on the revenue side. In Europe, governments are often criticized for the high expenditure of the State, that, to be funded, require a very high tax burden by the standards of other rich countries of the Americas and Asia. In Brazil, the load, estimated at 35% of GDP, is also considered high. For entrepreneurs, the cost of taxes is amplified by the heavy bureaucracy, another common point between Brazilians and Europeans. For ordinary people, high taxes mean much more than evidence of any electronics that costs two or three times more here than in New York or Miami. Due to the low quality of public service, the middle class has to resort to expensive private services of health, education and even security, making the load "real" exorbitant. Thus, it is possible to imagine that, politically, to use tax increases to remedy any tax problems in the future will become a task, at least more difficult.

Saved the proper proportions, the pension deficit is also among the item of public accounts which bring together Brazil and Greece and other Europeans. Not surprisingly, the Greek government has announced it will adjust the average age for retirement to 63 years in 2015 as part of measures to reduce the fiscal deficit. Today, the average age for men is 65, but for women it is 60 and the European Union pressing the country to reduce this gap, it would generate wide deficit, because women live longer men. The Brazilian situation is similar ad in some respects worse. Here you can retire based on time of contribution, which lowers the actual age of retirement by 10 years or more. Brazil already has a high pension deficit and tends to increase gradually with the continuous increase in life expectancy, now at 72 years. The Greeks live their social security crisis with a muhc gerater life expectancy, 79.5 years.

Compared to the Greeks, Brazil is betetr in terms of current account deficit. In Greece, this deficit is 11.9% of GDP, while Brazil expects 2% to 3% in the foreseeable future. The Brazilian deficit, however, is on an upward trend. It was $24 billion in 2009 and, according to research firm Focus, will double to $ 48 billion this year and reach $ 59 billion in 2011.

That is, the movie is not as good as the picture.

The fact that Brazil has a floating exchange rate itself, while the Greeks use the common currency of the euro area, lends greater flexibility to external accounts. If the deficit worsens, the dollar goes up and boosts exports, and vice versa. This fluctuation, however, has a cost. The higher dollar can help drive up inflation and the market is forecasting a rise in interest rates which emphasizes an issue inherited from the most unstable periods in the Brazilian economy: a high concentration of debt into floating-rate securities (SELIC).

Other parallels between Brazil and Greece are less favorable to Brazil. One is that, in extreme cases, Greeks and other inhabitants of the least wealthy of Europe have the safety of having very powerful potential saviors, such as Germany, France, the European Union and European Central Bank. Here in Mercosur there are more members asking for help than there are rescuers. It was for no other reason that the markets have been so patient for so many years with the Europeans and waiting for the deficits to reach the levels demonstrated today.

In Brazil, fiscal and current account deficits higher than today, but much smaller than those of European countries, were enough to cause acute crises in the past. Aside from the energy crisis of 2001, almost all the crises of the Brazilian economy, of moratorium of 80 years to maxidevaluations of 1999 and 2002, had the components or the fiscal account deficits - or both.

That is, the tragedy suffered by the Greeks today is not totally foreign to Brazil. Its ingredients also existed and exist here, but are still of little threat.

The good news is that we have time to act. The bad news is we do not talk seriously about it".

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jimmy said...
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