Monday, 29 December 2008

Brazil and The Sovereign Fund (Update)

As we in this blog humbly said President Lula would do, Brazil´s government overruled the authority of Congress and established, through the use of a decree measure, the fundraising scheme for the Sovereign Wealth Fund of Brazil (FSB.) It is a lousy move as, for the first time in more than a decade, the government is selling debt without having a corresponding revenue on the pipeline. It is also drawing money from the national savings destined to pay Brazil´s $600 billion debt to pay for expenses that aren´t necessary: the extension of aid to Brazilian companies to buy assets overseas, and the localisation of important, profitable investments in the local and global markets.

There are two things that we would like to highlight here: first, we would like to refute the government´s argument, which says the fiscal impact of the fund will be nil. That is partly true. The government, as one economist told me, is selling bonds to pay for primary (operational) expenses, not to pay for financial expenses (debt refinancing.) With the decree, the government scrapped a part of the law passed by Congress last week that prohibited feeding the fund with money from debt sales. Mistake No. 1.

The second thing is, how can you submit regional governments to obeying the Fiscal Responsibility Law if the federal government is overruling it to create an unnecessary tool of populist spending? What we mean by this is, states and municipalities are forbidden by the LRF to issue their own paper and sell it to investors. This is moral hazard.

Lawmakers will resume their duties at the start of Feb. We hope that they study this issue profoundly, and deeply. That decree, which has to be passed by Congress (or rejected) within six months of its publication, is bad at a time Brazil begins to feel the pinch of the global crisis. It would be irreponsible if Congress doesn´t revoke such decree.

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