The Current Brazilian Crisis Explained

Over the past several weeks, an economic and political crisis of a magnitude and scale not seen in over a generation has gripped Brazil. Economic stagnation has taken the place of what was once robust economic growth. The country’s GDP is expected to contract 0.5% this year. Unemployment is at 6% and rising fast. And inflation, which had been tame for the past 20 years, raised its ugly had once again as it passed the 8% mark. All of these developments have taken a heavy toll on second term president Dilma Rousseff, who has seen her approval rating plummet to 34%. In recent weeks over 1 million people took to the streets of Sao Paulo demanding Dilma’s impeachment.

But how did this happen? How could the fortunes of an emerging power like Brazil, a member of the BRIC bloc, and a country that until a few months ago was the darling of many financial analysts and investors, have changed so quickly?

The seeds of Brazil’s current crisis were planted back in 2003, when then president-elect Lula took office. Despite being a former head of a worker’s union and leader of the very left-wing Worker’s Party, Lula opted to mostly stick to the orthodox economic policies of his predecessor, the center-left politician, Fernando Henrique Cardoso. These policies, known as the “tripod of stability” were centered on balanced budgets, free-floating currency exchange rates, and an independent central bank. Many credited these policies with ending a period of high inflation that had plagued Brazil for over 50 years.

One of the reasons Lula opted not to break from the policies implemented by his predecessor was the fact that most of his cabinet was composed of political pragmatists that followed the adage: “if it ain’t broken, don’t fix it”. Over time however, most of the original “pragmatists” in his cabinet had to resign from their posts due to accusations of corruption.  Lula replaced them with hard-line old guard former communist guerrillas from the 1960s, and fellow union leaders, all whom openly despised the orthodox economic policies that had been in place until then.  The “tripod of stability” was completely reversed. Government banks (BNDES, Caixa and Banco do Brasil) were ordered to give out low-interest loans to pretty much anyone, but especially to people with good government connections. One of such was magnate Eike Baptista, who borrowed billions from those banks while offering very little collateral as a guarantee, to invest in oil exploration, build semiconductor plants and bio-diesel plants.

The government also started injecting huge amounts of public money into the real estate market. The government implemented a policy in which any worker with a formal job would received a government backed loan of at least 100 thousand Reais (about US$30K at the time). As a consequence, overnight 100 thousand Reais became the floor price of any home, in any condition, anywhere in Brazil. A huge construction boom started, as massive amounts of government credit flooded the real estate market. Home prices sky rocketed and there was a shortage of construction workers, which pressured wages across the economy.

At the same time, control of the massive state-owned energy company, Petrobras, was handed to one of Lula’s union friends. He immediately put Petrobras’ vast financial resources to work on expensive projects of very questionable economic value, but with potential for huge political dividends.  Such projects included a US $17 billion refinery in Lula’s home state. Many technical experts within Petrobras criticized the investment, saying that such a massive refinery was not needed, and even if it was, Lula’s poor and remote home state in the north was hardly the best place for such an endeavor. Those critics were quickly silenced and the project was placed on a fast track.

Other questionable investments conducted by Petrobras included the construction of a massive shipyard, also in Lula’s home state, and an acquisition of a refinery in Texas from a Belgian company for almost $900 million. Interestingly, that same refinery had been acquired by this Belgian company for $42 million only 4 years prior.

So, the stage was set for the tragedy that would follow. The artificial real estate boom gave Brazilian families a false sense of economic prosperity, as they watched the value of their homes triple or quadruple in just a few years. As a consequence, many of them went into deep consumer debt, trusting on the high value of their homes as backing. Magnate Eike Batista, who borrowed billions from government banks without any collateral, went bankrupt as most of his enterprises went nowhere, and the taxpayers were left holding the bag. Petrobras, as a consequence of the many new investments directed by the Lula’s cronies, became the most indebted energy company in the world ($179 billion). Most of its very bad investments tanked as multiple corruption scandals surfaced, where politically appointed Petrobras executives would demand bribes from suppliers and contractors. They pocketed part of the money, the other part went to the Worker’s Party campaign fund.  So far, the police have uncovered more than US$800 million paid in bribes.

So, Brazil today is facing not only a nearly insolvent Petrobras, but state-owned banks sitting in hundreds of billions of dollars in bad loans. Having to rescue the banks, the government is facing one of the largest budget deficits in modern history. All companies suspected of paying bribes to Petrobras had all government contracts suspended pending an independent audit. This means that constructions of bridges, subways, power plants, and roads have all been put on hold. Two of those very large construction companies have gone out of business as consequence of the moratorium, which caused tens of thousands of construction workers to lose their jobs. As the bribery investigation continues, more construction companies are expected to fold.

Predictably, the government created real estate bubble has burst. Apartment buildings are sitting empty across the country.  A large chunk of the population got into debt expecting the value of their “investments” to grow but now inflation is rising quickly and with it, the payments on their inflation-adjusted mortgages.  Meanwhile, the value of their “investments” plummet.  Overly leveraged home builders are sitting on unsustainable amounts of unsold real estate inventory. Many have folded, resulting in many more layoffs. The fear exists that this is just the tip of the iceberg, and that the police will now uncover similar corruption scandals in the state-owned banks and utility companies, which would escalate the crisis by an order of magnitude.

Renato Duque at the time of his arrest.

Despite all of the dark clouds in the Brazilian skies, there are positive signs that the institutions are working. The police are investigating, indicting and arresting people. The courts are convicting and sentencing them. The press is covering and investigating the events and publishing their findings. People on the streets are outraged and protesting.  Looking at things from that angle, there are some positive actions taking place. One can also argue that the Lula/Dilma and the Worker’s Party experience ruling Brazil has brought a lot of political maturity to the country. Many citizens used to fantasize about the “heroes of the people” of the sixties and how those former Marxist guerrillas were idealists, pure hearted and really cared about the poor.  Many think that their stint running the country has shattered that image, and showed to even most romantic and naive of their supporters how corrupt, ruthless and devious these people really are. These events in many ways are eradicating the last remnants of that old view of evil capitalists vs. good communists that still existed in Brazil.

Pedro M Calmon is a business development executive with extensive experience in Latin America. He attended the University Of Brasilia and has a MBA from Nicholls State University. He currently resides in the United States and works at Google Inc. The views presented in this article are his alone and do not necessarily represent the views of his employer.  

The Illusion of Suddenness

Watching media coverage of the situation in Libya this week, one gets the sense that suddenly, the revolution that ousted Gaddafi in 2011 is failing to live up to its potential.  Since yesterday, when the Egyptian Air Force opened a new front against the Islamic State of Iraq and the Levant (ISIL) with a bombing raid in the Libyan town of Derna, European pundits have been competing to send the gravest messages of concern about the deteriorating situation there.  Pronouncements from Sir John Sawers, former head of MI6; the Italian Minister of Defense, Roberta Pinotti; the French President, François Hollande; and a host of others emphasize the need for Europe to consider strong measures to contain the troubles in Libya. While it seems clear the 2011 notion that European air power could serve as a catalyst for future stability in the tribally-stratified north African state has truly gone out of style in 2015; the media hype surrounding the flatly delivered warnings has the feel of a focus group session where carefully nuanced versions of “boots on the ground” are measured for their effectiveness on the audience.  

For those of us paying attention however, the illusion of suddenness is little more than a tired refrain that should have lost its luster after the fall of Saddam demonstrated the need for “post intervention planning”.  Wolfgang Pusztai, a notable expert on the Libyan situation, has been discussing “Plan B” for some time, warning us in September of the “Lebanonization” of the country and suggesting that an intervention force may be the only solution.  Displaying remarkable prescience, he mentioned the possibility that such an intervention may actually come from Egypt…Until now however, Mr. Pusztai has been a rare voice in the wind which is striking given that Europe claimed to know better.  In fact, the mixed performance of massive nation building efforts by the United States in Iraq, criticized so bitterly in Paris, Brussels, and Rome in 2003, led indirectly to the situation in Libya; bringing us to the threads that tie all this together.

Algerian soldiers stand near the Tiguentourine Gas Plant in In Amenas
Algerian soldiers stand near the Tiguentourine Gas Plant in In Amenas

The 2011 fall of the Gaddafi regime unleashed a wave of weaponry and unfettered rebellious enthusiasm across the region.  Armed with Libyan weapons and a sense that something had changed, groups like Al Qaeda in the Islamic Maghreb (AQIM) took it as a sign that the time was right to execute war plans from Timbuktu in Mali, to in-Amenas in Algeria, to Homs in Syria where the war was still just another Arab Spring protest.  It took the French and Chadian Armies 30 days to roll back the situation in Mali, and the Algerians only three to flatten in-Amenas, but years later, the fires continue to grow in Syria where the Assad regime is proving much more resilient than Gaddafi or Mubarak.  Continuous combat in Syria has hardened both sides to a pinnacle of ruthless efficiency and the cancer is spreading.  Constrained by geography and sensing an opportunity across the border in Iraq, ISIL destroyed the better part of three Iraqi Army divisions, nearly exterminated the Yezidi, seized the upper parts of both the Tigris and Euphrates rivers and threatened to shatter Iraqi Kurdistan into four exiled communities.  The sum total of the massive American nation-building project there was thus reduced to ashes, setting the stage for ISIL to expand to Libya.  

Oddly, a semantic but resonant point is beginning to move the minds of European (and Egyptian) leaders in the direction of intervention in Libya; specifically that the Islamic State of Iraq and the Levant is now a threat in areas that are neither in Iraq or in the Levant.  Coupled with ISIL-connected terrorism in Paris, Brussels, and Copenhagen, it is increasingly clear that Europe has a problem.  Though we can expect intensifying public debate about Libya’s future, don’t expect that debate to feature the obvious point that the path to the present came from a poorly considered European intervention in Libya’s recent past.

Lino Miani

Lino Miani is a retired US Army Special Forces officer, author of The Sulu Arms Market, and CEO of Navisio Global LLC. 

Misrata’s Next Steps: Narrowing the Window to Save Libya

Originally published in September 2014 by the Navisio Global Publishing Unit

After several weeks of bloody fighting during what they termed “Operation Libya Dawn”, on 23 August militias from the town of Misrata finally conquered Tripoli International Airport from their adversaries, the Zintani. The capture of the airport and expulsion of the Zintani marks the achievement of the Misrata’s military objectives after losing recent elections for Libya’s interim parliament, the House of Representatives (HoR). Fearing political marginalization in Tripoli in the face of the more established Zintani, the militarily superior Misrata saw this as their only remaining alternative. With Tripoli finally under their control, the struggle for Libya’s capital appears to be decided, at least for the time being, but as the Misrata prepare their next steps, the international community faces a narrowing window of opportunity to achieve a stable solution in Libya.

The Misrata = “Islamists”?

Though quite frequently branded “Islamists”, many of Misrata’s citizens argue (rightly) this is not true. But while a radical Islamic state of Libya with a strict application of the Sharia is probably not in the business interest of the harbor town of Misrata, behind the scenes there is already a struggle for influence between the radical and the moderate Islamists, and the others in the town. As it looks now, the Islamist influence will increase over time for two reasons:

  • the city is a stronghold of the Libyan branch of the Muslim Brotherhood
  • several militias of the Misrata coalition are led by (radical) Islamists; some of whom are former members of the Libyan Islamic Fighting Group, an organization that produced several prominent Al Qaeda leaders like Abu Yahya al-Libi who was Al Qaeda’s number two when he was killed by an American drone strike in 2012.

Current Situation and Background

After their military success the Misrata are widely unchallenged in the capital where they are busy consolidating their positions and solidifying their control of the city. This includes acts of revenge against members and property of the Zintani coalition that remained in Tripoli, and against the Tawergha, who were dispersed from their own city by the Misrata in 2011 because of their support for Gaddafi during the revolution. The Zintani brigades have withdrawn to their strongholds in the Jabal Nafusah mountains, scene of their May 2011 victory over Gaddafi’s mighty army. There they are reorganizing their troops while trying to resupply. Though it is very unlikely that Libya Dawn forces will be able to mount a successful attack on the Zintani stronghold, a successful Zintani counterattack from there can also be ruled out for the near future. Thus, the former military stalemate in Tripoli is replaced with a stalemate in northern Tripolitania.

The Misrata wasted no time shifting their efforts to the political side. On 25 August, they unexpectedly resurrected the former General National Congress (GNC) – an embarrassment to many people that voted for the HoR. Replaced by the HoR in the recent elections, the original 200 member GNC was elected in 2012 as the first interim parliament of Libya. Though the strongest single party in the GNC was the liberal-leaning National Forces Alliance of the first interim Prime Minister, Mahmoud Jibril, a block of various Islamists widely dominated the original GNC. Though the estimated number of parliamentarians that showed up to vote varied from a few dozen to as many as 94 (the former minimum requirement for quorum), the GNC nevertheless designated the Islamist Omar al-Hassi the country’s new, but hardly legitimate, prime minister.  [Of the 200 seats in the GNC only 80 were allocated to political parties. Of these Jibril´s NFA got 39, the JCP (close to the Muslim Brotherhood) got 17. The remaining 120 seats were for independent candidates. The Islamists managed to drag many of these “independents” on to their side and formed an “Islamist block” in the GNC. -WP]. Meanwhile, the interim government of the legitimate Prime Minister, Abdullah al-Thani, resigned on 28 August to make way for formation of a new government. Within days however, al-Thani was asked to again form a government with the HoR leaving Libya with two competing legislatures and divided both militarily and politically.

Misrata’s Intent

The next objectives of the triumphant Misrata will be to safeguard their achievements by military, political, and economic means. Militarily they must protect the western flank of their positions in Tripoli and keep open the vital coastal road to Tunisia. This will take them and their local allies, the “Knights of Janzour” and “Libya Shield West”, deeper into the tribal areas of the Wrishfana (confederates of the Zintani) where the first clashes have already begun.

Politically the Misrata are attempting to overcome their recent electoral defeat by simultaneously offering incentives and applying increased pressure. While Libya Dawn forces invited the HoR to move to Tripoli and guaranteed the security of its members, it may be that by initiating the designation of a new prime minister, the Misrata want to force the HoR to select a compromise candidate as a head of the future government. This would be even easier for them if the legitimate interim parliament were located in Tripoli as their militias (like several others) are already well experienced in blackmailing parliamentary assemblies. The fact that the HoR again asked Prime Minister Abdullah al-Thani to form a cabinet despite his repeated insistence that he does not intend to continue serving, could be an indication that the HoR wants to keep open the door for negotiations with the Misrata. It remains to be seen how long they intend to stick to the old assembly and its weak, compliant president Nuri Abu Sahmain. Whatever the case, the very dangerous idea of reviving the GNC could eventually contribute significantly to the split of the country.

Political maneuvers and military campaigns will have little sustained impact however if the economics aren’t there to sustain the effort. For this, the Misrata know they must gain control of at least part of Libya’s hydrocarbon wealth.  Though the coastal strip from Sabratha to Tripoli and further on to Misrata and Sirte is now, with some exceptions, under control of the Misrata and their allies, this does not include a significant part of the hydrocarbon infrastructure (other than the refinery in Zawia) or water sources of the Great Man-Made river.

Misrata's Next Steps
The Situation in Libya, September 2014

These resources are decisive for any Libyan government and therefore it can be expected that the Misrata will try to gain influence by political or military means over the oil fields in the Sirte basin and the oil terminals on the coast of Gulf of Sirte (Ras Lanuf, Brega etc.). Those facilities are currently more or less under the control of the federalist Ibrahim Jadhran, who had blocked oil exports for months.

Misrata will also try to get the oilfields in the south under control, but this is much more difficult. Several of those fields are under firm control of tribes allied with the Zintani and the pipelines to the coast run through or close to Zintan controlled territory where it would be easy for Misrata’s opponents to interrupt the vulnerable tubes and attack the pumping stations.

What Can be Done?

The situation in Libya looks dire. There are four likely scenarios in the midterm (in order of decreasing likelihood): sustained multilateral civil war or “Lebanonization” of the country; an international intervention in the form of a peace-support operation; a political solution; or a decisive Islamist victory. It is also quite realistic that there will be a combination of the first two scenarios. For example, a peace-support operation limited to the critical area in and around the capital may not prevent civil war from raging in several other parts of the country. While mention of peace-support conjures images of European armies patrolling tense neighborhoods, we must also consider the possibility of an Egyptian intervention in the form of establishment of a “Ground Safety Zone” on the Libyan side of the border. After all, Europe is not the only place for which instability in Libya presents a security problem.

There may however be a narrow window of opportunity to prevent the country from descending into total chaos. The UN Security Council recently called for an immediate ceasefire but implementing such a measure will not be easy (see United Nations Security Council Resolution 2174). Politically, the current situation of divided government is inimical to a settlement there. Therefore it is absolutely vital that the international community force all parties to the negotiating table to accept the HoR as the only legitimate representative of the Libyans. To this end there must be focused support on moderates in Misrata and in Zintan to prevent the “hawks” from dominating. Countries like Turkey, Qatar, and the United Arab Emirates must be convinced to influence their Libyan partners to keep a ceasefire and commit themselves to the democratic process.

Sanctions against individuals are a good tool although they will not have a quick impact. They must include political, military, and militia leaders as well as religious leaders from all groups unwilling to accept and support the democratic political process. Though these sanctions will make the daily business of the few remaining embassies in Tripoli even more difficult, their current situation is already forcing them to operate in a state of crisis.

Lastly, armed groups not entirely subordinated to the will of the legitimate government must be withdrawn from the capital, regardless which faction they come from. This must be achieved by international political pressure, a political compromise in Libya and, if necessary, by an accompanying international military Peace Support Operation. Such an International Stabilization Force would be a last resort to prevent a Libyan collapse (see Wolfgang Pusztai, “An International Stabilization Force for Libya?”), but as the preparations for such an operation takes months it is necessary to start the discussions and preparations now.

Wolfgang Pusztai is a freelance security and policy analyst. He was the Austrian Defense Attaché to Libya from 2007 to 2012.

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