Brazil: Will the Workers Party Win the Elections?

Latin America's biggest country is on the verge of electing its first leftwing head of state in 40 years.

Who is likely to win?

Come Sunday, Latin America's biggest country could elect its first leftwing leader for 40 years, Luiz Inacio Lula da Silva of the Workers party. With 41% support in the polls and 20 points ahead of the next challenger - ruling party candidate Jose Serra - Lula, as he is commonly known, could win the presidency outright in the first round.

What is Lula's background?

Lula began his political rise in the late 1970s, when he lost a finger in a work accident and emerged as a major union leader in defiance of the rightwing military dictatorship. Spurred on by his brother, Jose Ferreira da Silva, then a leading member of the Communist party, Lula helped organise a now-legendary demonstration for workers' rights at a stadium in the industrial belt outside Sao Paulo in 1978.

What was so special about the event?

He spoke without a microphone to a crowd of more than 80,000 workers, the story goes. But his words were so inspiring that workers in the front rows turned around and relayed his words to those behind them, who did the same, until the whole stadium began applauding. Lula's powerful oratory forms the bedrock of his appeal.

Did Lula almost win before?

Brazil's equivalent of Arthur Scargill was runner-up on three previous occasions. In 1989, Lula looked set for victory until the very last minute when a late swing snatched victory away. A former metalworkers' union leader with only a high school technical degree, Lula says he has learned from his past mistakes. He has toned down his firebrand image, hired a style consultant, trimmed his beard and wears suits and ties rather than open-collared shirts.

Has this assured voters?

He also formed an alliance with the centrist Liberal party, dominated by Lula's running mate, Jose Alencar, a textile tycoon whose presence on the ticket has gone down well with businessmen. He has also sought to reassure foreign investors by playing down fears of a debt default, insisting that a leftwing government would "not lead Brazil into bankruptcy". Even his opponents call him the Little Lula of Peace and Love.

Why are foreign investors afraid?

After Argentina's economic meltdown, investors fear a similar scenario in Brazil, except on a much bigger scale. Brazil's problem is debt - $255bn (162bn). Brazil's net public debt equals 62% of its gross domestic product, compared with 54% for Argentina last year. About 45% of Brazil's debt is tied to the US dollar. As the Brazilian real weakens - the currency has plunged 44% this year - so the debt grows. On the plus side, however, a weaker real boosts exports and Brazil's current account - the broadest measure of trade - has improved.

Has Brazil received international help?

In August, the International Monetary Fund unveiled a $30bn rescue package, boosting Brazil's ability to defend its currency. The move represented a u-turn on the part of the US as it previously opposed bail-outs for countries in financial trouble. But Brazil is too big too fail. It is America's 13th largest trading partner and its annual trade with the US amounts to $40bn.

What does the IMF say about Brazil?

The IMF has been at pains to stress Brazil's sound economic management, but investors can behave like sheep and push countries into crisis as was the case in the Asian crisis of 1997. In that crisis, what started off as a financial crisis in Thailand rapidly spread to other south east Asian countries, including Indonesia, Hong Kong and Malaysia, hence the term "Asian contagion".

Was Brazil a basket case before?

Like many Latin American countries, Brazil has suffered from soaring inflation in past decades. But reforms introduced by Fernando Henrique Cardoso in the 1990s, including privatisation, tamed inflation and brought stability. In 1997, Cardoso, a former leftwinger himself, was named Latin American leader of the year. But limited progress in redressing one of the world's most unfair distributions of wealth chipped away at his popularity. Lula has also tapped into a mood of being pushed around by richer countries, such as the US.

What is the risk of contagion from Brazil?

First, Lula has said his government would not renege on Brazil's debt. Second, some economists argue that investors have limited exposure to Brazil. According to Avinash Persaud of State Street bank, investors have most of their money in US corporate bonds, not emerging markets. This suggests, he says, that "contagion will be limited and is best halted with domestic remedies, perhaps facilitated by some breathing space from the creditors". Investors will be keeping their fingers crossed.

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