Brazilian markets have shrugged off last week's announcement of a $30 billion International Monetary Fund aid package and continue to slide toward the abyss. Nobody can know for sure where it all will end, but it's clear that the dynamics driving the crisis have been poorly understood. The "solution" -- this massive infusion of IMF aid -- is not helping; it may well be making a bad situation worse.
The trouble starts with the mistaken view that the Brazilian upheaval is provoked by the solid showing in the opinion polls of the Workers Party candidate, former union leader Luiz Inacio da Silva, universally known as "Lula." The fear is that Lula might win in the October presidential elections and drag Brazil to the left, undermining the market reforms of the past decade.
Yet the crisis, at its core, is financial and not at all the work of the Lula candidacy. The current government created it by issuing a large proportion of its debt in dollars. As normal changes in risk perception produced by a political transition sparked capital outflows, the government tried to defend the currency with its dollar reserves. This frightened investors. They began to worry that it wouldn't have enough dollars to pay them back.
This transition is hardly routine. It marks the end of an unprecedented two-term presidency, and only the second time in over 50 years that a democratically elected Brazilian president will complete his full term in office. Thus it should have been anticipated that some capital would move to the sidelines -- that is, out of Brazil -- until the uncertainty passed. But it is the magnitude of government dollar obligations that has put the markets on heightened alert. Lula only added fuel to the fire.
There is also a misguided belief that the weak showing of the government-supported candidate, Jose Serra, is a surprise, and has therefore aggravated the crisis. But Mr. Serra's poor polling numbers could have been anticipated. Contrary to conventional wisdom, they are not caused by his lack of charisma, but reflect the fragility of his political backing.
The coalition that sustained President Fernando Henrique Cardoso through two elections broke apart well before the presidential campaign began. Not only had its anchor to the right, the Liberal Party (PFL) defected, but it had lost the support of several key power-brokers.
Chief among these is the deposed Senate president but still-powerful political boss, Antonio Carlos Magalhaes, whose son before his early death had been seen as Mr. Cardoso's heir apparent. The list also includes former president and influential senator, Jose Sarney, whose daughter had been doing well in the presidential campaign until she was unceremoniously dumped. Her undoing was a well-publicized, and in Mr. Sarney's view politically motivated, raid by the federal police which found wads of unexplained cash in her husband's business office.
Mr. Serra cannot even count on the support of the president's own Social Democratic Party. The governor of Ceara, Tasso Jereissati, one of the party founders, is the mentor of Ciro Gomes, a presidential candidate in his own right and Lula's most formidable competitor in the opinion polls.
Even if Mr. Serra were to win, it would hardly guarantee the advance of liberalization that Brazil so desperately needs. He was the loyal opposition within the Cardoso government, and the main critic of the policies of Finance Minister Pedro Malan, and the central bank president Arminio Fraga. Mr. Serra comes from the "developmentalist" wing of the Brazilian left, and he is the favorite candidate of the protection-minded industrialists of São Paulo. He speaks more often of import substitution than he does of free trade.
A kind of hysteria has developed over Lula's popularity, a fear of a Brazilian lurch to the left. But the truth is more complicated. Remember that Mr. Cardoso also likes to think of himself as a man of the left. Yet to gain power he formed an alliance with the center-right. Likewise, Lula knows, having run and lost three times before, that he must move to the center if he is to attract the critical middle class votes he needs to win.
Watching from abroad many observers see a Lula or Gomes victory as a radicalization of Brazil. This is not likely. In October all of Brazil's governors and all the seats in Congress are also up for grabs. There is no evidence at the state or congressional level of any great shift to the left. In fact, many old stalwarts of Brazilian politics are back and running, among them the right-wing populist Paulo Maluf, who is doing well in the contest for the governorship of Sao Paulo. The vast majority of Brazil's politicians, whatever their temporary party affiliation and rhetorical flourishes, cling to the status quo. This makes reform in Brazil difficult. But it is what also makes Brazil politically a very conservative place.
In this context, the IMF bailout is the wrong medicine at the wrong moment and threatens to worsen a fragile situation. Instead of encouraging an open discussion of how to get the country growing and able to service its debt, the package creates the illusion that the country can delay needed action. Moreover, locals and foreigners are likely to use the "aid" to sell reais and buy dollars as the Central Bank tries to defend the currency.
When Treasury Secretary Paul O'Neill was in São Paulo recently, he took time off to visit the poor. On top of a shiny briefcase he countersigned one dollar bills and handed them out. Now, a week after the IMF bailout was announced it seems the only Brazilians who are better off are the recipients of Mr. O'Neill's personal largess. Provided, that is, they had the good sense to hold the crisp new dollar bills as the real sank.
Mr. Maxwell is director of Latin American Studies at the Council on Foreign Relations in New York.