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Economic woes cloud Brazil poll
SAO PAULO, Brazil (CNN) -- It is clear the markets would like Jose Serra to win Brazil's presidential election on Sunday, but 50 million Brazilian's living below the poverty line have their own champion. Opinion polls suggest the former metals union boss Luiz Inacio Lula da Silva will garner almost enough votes in the first round of voting to win the presidency outright. If he fails, there will be a runoff on October 27. Investors in Brazil and abroad fear that Lula, who has called on his country to renegotiate its debt, may not be up to the task of managing Latin America's largest economy and its $260 billion debt. Lula, the leftist front-runner, has attempted to move to the centre and has pledged to abide by the conditions of a $30 billion aid package from the International Monetary Fund
"The markets would like Serra to win, but that is more hope than expectation," Philip Poole, head of emerging markets research at ING Financial Markets, told CNN. "There is considerable concern that Lula could release the financial strings. "Lula has been trying to talk sensibly to the markets. What the markets want is for confidence to return but, Lula has not addressed the fundamental issues," Poole added. "In fact, neither has Serra, who ever wins needs to restore confidence. That would mean they need to appreciate the currency, grow the economy and meet debt payments." But Pool said the scope for manoeuvrability is "limited" because the global economy is struggling to grow. Investors applaud the economic policies pursued by current President Fernando Henrique Cardoso -- but he is not running this time -- and his favoured candidate Serra is in second place in the polls, closely followed by Anthony Garotinho, leader of the popular socialist party.
Ever since Lula emerged as front-runner for the top office financial markets have been marking down Brazilian assets. The national currency, the real, has lost around 40 percent of its value this year and stocks and bonds are at multi-year lows. This week they fell to four-year lows. On Thursday night, Serra failed to make any headroom in the last televised presidential debate as he touted his 40-years of government. "The important thing is to see how important experience is and the difference between what someone says on the campaign trail and what you do when in government," said the 60-year old former health and planning minister in Cardoso's government. But Lula shot back: "That experience you talk about so much, Serra, is responsible for leaving Brazil bankrupt." International investors pulled 511.6 million reals ($138.2 million) out of the Brazil's stocks market, the Bovespa, in September, bringing the year-to-date total to 2.16 billion reals. And many companies, which have invested heavily in the world's 12th largest economy, could see profits decline if the currency continues to come under pressure if Lula wins. Spanish companies, like banks Santander Central Hispano, Banco Bilbao Vizcaya Argentina, telecom operator Telefonica and energy company Endesa, have invested as much as 35 billion euros ($35 billion), according to analysts. Other banks with investments include Britain's HSBC Holdings (HSBA) and ABN Amro of the Netherlands. A falling real – triggered by investors fleeing to safer havens – cuts into the profits of overseas based companies. Santander Central Hispano, Spain's biggest bank, has loaned about $600 million to businesses in Brazil and has invested $7 billion in Brazil, primarily in retail banking, and has five million clients there. SCH and rival Banco Bilbao Vizcaya Argentaria have raised their bad loans provisions for Argentina because the Bank of Spain reclassified its country risk. Brazil is SCH's most important market in the region, accounting for about one third of Latin American assets. Some analysts say it overpaid for Banespa, the $5 billion purchase of which was completed in 2001. Whoever wins Sunday's election has a monumental task of kick starting a stagnant economy with rising unemployment -- where a quarter of the 170 million population is poor – and convincing investors that Brazil is worth pumping money into.
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