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. Last Updated: 07/27/2016

Brazil Leader Faces Austerity Fight




SAO PAULO, Brazil -- Brazilian President Fernando Henrique Cardoso readied Monday for a week of grappling with political foes who oppose austerity tactics to get the country out of its deepest economic crisis in years.


Seven state governors from opposition parties were pressing ahead with demands for a renegotiation of their debt owed to the federal government.


Although Cardoso said as recently as Friday that he will not renegotiate the debts, some of the governors were planning to show up at the Presidential Palace on Tuesday to demand a meeting, local media said.


Analysts said the face-off could undermine Brazil's fragile comeback from the worst part of the financial crisis that erupted four weeks ago. "If the debt issue with the states cannot be solved, that may have a symbolic significance in demonstrating Brazil may be rather incapable of performing the budget cuts agreed with the IMF," said Adam Slater, economist at Rabo Bank International in London.


The International Monetary Fund and Brazil have agreed that the Cardoso administration will have to tighten spending further to make up for the impact of the 30 percent currency devaluation on the budget deficit.


An IMF team will finish up its two-week visit before the Carnival holidays begin this weekend, hopefully with an accord to take back to the fund's board in Washington.


Brazil anxiously awaits a second installment of an IMF-led credit line of $41.4 billion, assembled last November to save Brazil from a Russia-style economic collapse.


The government has so far given no clues where it can pare its already skeletal budget to offset the higher debt costs as the country hiked rates to keep money in after the shock devaluation.


But market watchers suspect Cardoso may get his allied governors to start slashing their payrolls.


A prolonged impasse between Cardoso and the rebellious governors f which started with a declaration of debt moratorium by Minas Gerais governor Itamar Franco in January f could divert the government at a key juncture.


Cardoso is in deep need of a victory as his popularity hits all-time lows. He must also show that he has the resolve to fix the economy and rebuild international confidence in the world's eighth-largest economy.


A nationwide poll released Sunday found 36 percent of Brazilians thought Cardoso was doing a bad job as the nation tilted into what would likely be its worst recession in three decades. Only 21 percent approved his performance. Financial markets were also looking out for new appointments to the nation's central bank policy-making team this week after the government named Arminio Fraga, top aide to billionaire George Soros, as the bank's president last week.


Brazil's tattered currency recovered somewhat last week on the stunning news, as traders welcomed the entry of "an operator" who understood markets at the helm of the bank.


But markets were seeking stronger guidance from the central bank this week to help the market regain more calm.


Brazil's real was trading at 1.84 reals to the dollar by Friday, representing a devaluation of 34 percent since the government first let go of its tight grip on the currency.