how the Argentine crisis can help Lula strengthen himself as a regional and global leader

Lula chose as one of his priorities in the meetings with the leaders of the G7 to try to help Argentina to renegotiate the conditions of the loan with the IMF

Lula chose as one of his priorities in the meetings with the leaders of the G7 to try to help Argentina to renegotiate the conditions of the loan with the IMF

Photo: Reuters / BBC News Brazil

President Luiz Inácio Lula da Silva (PT) landed early this Friday (5/19) in Hiroshima, Japan, to attend the G7 meeting — a group made up of Canada, the United Kingdom, Japan, the United States, Italy, Germany and France.

It will be the first time in 14 years that a Brazilian representative participates in the G7 meetings. This year, eight nations were invited: India, Indonesia, Australia, Cook Islands, Comoros, South Korea, Vietnam, in addition to Brazil.

In front of the leaders of the seven most industrialized nations in the world, Lula intends to expose a historical problem that is well known to Brazilians: Argentina’s economic crisis.

With inflation of almost 110% a year, annual interest at 97%, dollar reserves at the lowest level since 2016 (and which some analysts already see as negative, in practice) and the super-devalued peso, Argentina recently faced the worst drought in 94 years (which also hit the southern region of Brazil), which broke the corn and soybean crops in the country.

The catastrophic scenario — in an election year — led Argentine President Alberto Fernandez to make an emergency visit to Brasília two weeks ago, to ask for financial help.

“In fact, at this moment, Argentina already has liabilities of more than US$1 billion, it is already in the red. It is evident that the loss of export earnings due to the drought had violent effects, but the problem already came from before. situation in which literally in a little while the Argentine Central Bank will have to declare itself incapable of delivering dollars to finance the services. It is a situation of moratorium in weeks, months. What is happening now is very similar to the scenario of 2001”, affirms the economist Otaviano Canuto.

In this speech, the former vice-president of the World Bank and senior member of the Policy Center for the New Global South refers to Corralito, the last major crisis in the neighboring country that led to a package of measures to prevent bank runs .

President Lula and First Lady Janja upon arrival in Japan

President Lula and First Lady Janja upon arrival in Japan

Photo: Ricardo Stuckert/PR / BBC News Brasil

Faced with this situation, Lula chose as one of his priorities in meetings with the G7 leaders to try to help Argentina renegotiate the conditions of the US$ 44.5 billion loan contracted with the International Monetary Fund (IMF) in 2018.

Concerned with issues such as the dispute between the US and China, food security, production chains, climate warming and the War in Ukraine, the members of the G7 do not have the Argentine economic crisis as one of their priorities.

However, according to Lula’s advisers, the president’s logic for trying to get the agenda is simple: “if they (G7) want to discuss Ukraine, we want to discuss Argentina, these are the priorities.”

Pressure on shareholders

With the exception of Canada, the other six members of the G7 are among the ten largest financiers of the IMF (Brazil is currently the bank’s tenth largest shareholder, and India, which will also be at the event, is the ninth).

According to sources heard by BBC News Brasil at the Ministry of Planning, at the Treasury and at the Planalto Palace, the Argentines asked and Lula agreed to take the request to the leaders for the IMF to make the fiscal targets of the current loan agreement more flexible — which Argentina will be unable to to meet — and for it to accept advance transfers of around R$80 billion, which should be disbursed by December by the Fund if the targets were met by the Fernandez government.

On a recent visit to China, Lula had already cited the case of Argentina and the IMF to criticize multilateral banks and exalt the New Development Bank (NDB), or bank of the Brics, currently chaired by former president Dilma Rousseff.

“Banks have to be patient. If necessary, renew the agreement and put the word tolerance in each renewal because it is not up to the bank to suffocate the countries’ economies, as the International Monetary Fund is now doing with Argentina,” said Lula .

Even before Lula’s arrival in Japan, it was up to the Minister of Finance, Fernando Haddad, to address the issue of Argentina in the Financial G7 with at least three of his counterparts, during bilateral meetings.

Lula chose as one of his priorities in the meetings with the G7 leaders to try to help Argentina to renegotiate the loan

Lula chose as one of his priorities in the meetings with the G7 leaders to try to help Argentina to renegotiate the loan

Photo: Reuters / BBC News Brazil

The minister tried to “sensitize” US Treasury Secretary Janet Yellen, Japanese Economy Minister Yasutoshi Nishimura and Indian Finance Minister Nirmala Sitharaman.

Haddad has justified the mediation based on immediate Brazilian interests: along with China, Brazil is Argentina’s biggest trading partner and has a trade surplus with its neighbors.

Economists estimate, however, that no matter how bad the Argentine crisis is, a “contagion effect” on the region’s economy is unlikely.

Questioned on the subject by BBC News Brasil, US diplomats said they were aware of Lula’s “criticisms” of multilateral banks in Washington, but avoided taking a position on Argentina’s new request — the US represents almost 17% of the IMF’s capital.

Publicly, the IMF says it maintains “constructive debates” with Argentine officials and does not discuss the terms of the agreement, which are confidential. But in the financial market, the perception is that there is little sympathy for the Argentine election.

Recently, the Argentine newspaper La Nación quoted sources at the fund who say they fear the electoral use of an eventual advance — Fernandez has just announced that he will not run for re-election.

At the Ministry of Finance and Planning in Brazil, the understanding is that the disposition of the Fund “is not the best”. But that government pressure could destabilize the current representative of Brazil on the Executive Board, Afonso Bevilaqua, in the post since the Bolsonaro administration.

“This request from Argentina would only be possible if the big shareholders wanted and decided to give additional funds, without guarantees. I don’t see this as justifiable (Argentina’s request), as viable by the IMF rules. Deep down, what the government of Argentina is trying to do is push an unsustainable situation with its belly”, says Canuto.

Regional and global leader

Right at the beginning of his term, Lula demonstrated his intention to return to betting on Mercosur

Right at the beginning of his term, Lula demonstrated his intention to return to betting on Mercosur

Photo: Reuters / BBC News Brazil

If he has little chance of success in softening Argentina’s financial situation, the fact that Lula has taken up the country’s cause with global leaders is yet another attempt to leverage Brazil’s stature both regionally and globally.

For the Southern Cone countries, it would signal the country’s commitment to using its privileged spaces in global politics in defense of regional interests. For global leaders, it would show that Brazil does not just speak for itself, but represents a group of nations that see it as a leader.

The perception in the Lula government, according to advisers, is that this would be another opportunity to show that “Brazil is back.”

According to the professor of international relations at the Federal University of Minas Gerais (UFMG), Dawisson Belém Lopes, the Lula government began by “accelerating” a foreign policy that, in fact, it has adopted for decades.

“Brazil and Argentina have been allies in diplomacy since the 1970s and 1980s with Itaipu, passing through Mercosur and today reaching forums such as the G20 and even the UN Security Council which, now that Brazil is a non-permanent member, opens space for Argentina, Chile, and other South American allies in this effort to galvanize support and to become a leader in their region, and eventually in Latin America and the Caribbean,” says Belém Lopes.

“Within the scope of the G20, the great Brazilian ally is Argentina. There is a composition of interests there whose main objective, naturally, is to join forces to be able to exert pressure, to be able to guide the meetings and provide greater attention to the views of the global South .”

The four years of the Bolsonaro administration represented a hiatus in this foreign policy. But still in January, when making his first official visit to Argentina and Uruguay, Lula demonstrated his intention to reverse direction and bet once again on Mercosur.

At Itamaraty, the understanding is that this type of agenda is also important to make it clear that Brazil does not see itself and does not want to be treated only as an environmental leader. Brazil will assume the presidency of the G20 next December and, as leader of the bloc, invited Paraguay and Uruguay, Mercosur partners, to act as invited members of the bloc.

In this context, a notable absence in the discussions proposed by Brazil in the G7 must be the Mercosur-European Union trade agreement. Treated as a priority during Lula’s campaign, which criticized Bolsonaro for not having concluded the agreement due to environmental issues, the text became a reason for contention within the PT government.

The content of a letter sent by the European Union with environmental demands did not go down well with the leaders of the region.

In the Brazilian federal administration, departments such as Finance, Planning and the Ministry of Development, Industry, Commerce and Services believe that it is possible to respond to the Europeans in the same tone through diplomatic channels, without the need to reopen the terms of the already approved agreement.

The other side, represented especially by the Civil House, sees unacceptable conditions in the terms of the letter and the agreement itself. Faced with the management arm wrestling, Lula started to avoid very assertive comments regarding the Mercosur and European Union agreement and a final position by the president should only be taken after his return to Japan. During the Financial G7, Haddad did not address the issue.

Belém Lopes proposes a possible explanation for the apparent paradox of Brazilian silence regarding the Mercosur-European Union agreement in such a privileged forum.

“Without going into the merits of whether it is good or bad, I think it is understandable (the position of the Lula government). Brazil wants to lead its region, it is clear that resuming regional leadership is a priority. An initiative such as the Bi- Regional European Union-Mercosur could eventually dilute this Brazilian capacity to lead its own region, especially if the agreement is not perceived as good for Brazil or for sectors of the Brazilian economy, of Brazilian industry. no rush”, says Belém Lopes.

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