June 4: Containing tensions

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Always the diplomat, José Miguel Insulza understandably wants to play down regional tensions ahead of this week's 36th general assembly of the Organisation of American States. Even so, the secretary general's claim that the Santo Domingo meeting that finishes on Tuesday will be "quiet because there is no crisis of governability in the region" seems to stretch credibility.

In fact, the meeting comes at a crucial time in Latin America. As the head of the OAS's observer mission in Lima pointed out this weekend, Latin America could be a very different place on Monday, depending on the results of the Peruvian election. Victory for Ollanta Humala, the radical nationalist, would extend southwards the "Bolivarian axis" being constructed by Venezuela's Hugo Chávez, increasing divisions in the region and making life even more difficult for the OAS.

To be fair to the secretary general, however, there would be little point in over-dramatising the situation. For the OAS, the maintenance of democratic institutions remains a fundamental objective, since open debate and regular elections are vital for containing social and political tensions. And to its credit, slow, patient, painstaking negotiations designed to achieve that objective have yielded dividends.

Mr Insulza has spent much of the past year focused on helping two smaller states - Haiti and Nicaragua - maintain some semblance as viable democracies. Haiti's polls back in February were tumultuous, but the country now has a president with a popular mandate, René Préval , and is more stable than it was a year ago.

Nicaragua, meanwhile, will hold elections in November. The OAS is pressing the leftwing Sandinistas and the rightwing Liberals alliance - which now controls the legislature and most of the country's institutions, though not the presidency - to make the race as open as possible, ensuring that the victors will enjoy some of the legitimacy that they need to govern.

Mexico's election

Just over two months ago Mexico's private-sector companies were prepared for what seemed the inevitable: Andrés Manuel López Obrador, the leftwing candidate was going to win the presidential election on July 2 and companies were going to start putting in place their contingency plans.

Things may not have been to their liking, but at least they knew what was going to happen, and that provided more than a little comfort.

Today uncertainty reigns, and only a couple of pollsters from a long list show any daylight between Mr López Obrador and Felipe Calderón, the business-friendly centre-right candidate for the National Action Party (PAN).

A highly effective "negative" advertising campaign by Mr Calderón's camp to associate his adversary with chaos and economic disaster has succeeded in whittling down the gap, and even pushing Mr Calderón into the lead.

But some polls now suggest that Mr Calderón's bubble is deflating slightly, while Mr López Obrador has found a second wind.

None of this is good for Mexico or Mexican businesses. The rise in global interest rates has already injected volatility into the local stock market - in May it suffered the two biggest daily falls in the last three years - and the peso has weakened against the dollar in recent months. The last thing companies want now is further uncertainty flowing from the tight electoral race.

The uncertain outcome of the elections has now started to hit some financial indicators, and interest rates on 90-day and 180-day locally-issued government debt have been rising, ironically, since Mr Calderón started to recover ground in the opinion polls.

With a televised debate scheduled for Tuesday night, this week will almost certainly add another layer of uncertainty, as businesses and analysts try to work out who came out on top and how that will influence voting behaviour.

The only certainty for now is that nobody knows who will be Mexico's next president. And that is worse than not knowing - even if you think the winner is not the best choice for business.

Going, going?

On Friday June 2, the FT's Brazil correspondent wrote the introduction to an article scheduled to run in Monday's newspaper: "After years of decline and months on the brink of collapse, the fate of Varig, Brazil's debt-ridden flag-carrying airline, should finally be decided today. Or possibly not."

The "not" turned out to be correct, and the scene was delayed along with Varig's sale, now set to take place on Thursday June 8. This was the second time the date had been changed. Originally due to take place between July 9 and August 9, the auction was hastily rescheduled last week and set for June 5 when it became clear that Varig needed cash up front as quickly as humanly possible to prevent aircraft leasing companies from reclaiming their aircraft.

On the basis of the new auction date and requirements, under which the winning bidder must deposit $75m within three days of the sale, a New York judge postponed that fate until at least June 13 (although there is no guarantee that leasing companies will get their hands on any of the $75m). But with just four days of access to the data room and the auction set to take place on a Monday (with banks closed over the weekend), potential buyers demanded more time to prepare bids and put their finance together. Now they have until Thursday.

In the running are one Portuguese and four Brazilian airlines, backed variously by North American and European investors. But there is no guarantee that anyone will bid. The main reason is uncertainty over the status of Varig's estimated R$8bn in debt (which itself seems to be an unknown quantity: neither Varig, nor its administrator while under judicial protection from its creditors, nor the office of the overseeing judge, nor the consultants acting for the judge, were able to supply numbers to the FT last week).

What worries bidders is the way Brazil's new judicial recovery law (similar to US Chapter 11) is apparently being bent just as it is put through one of its earliest tests. The law allows subsidiaries of a company under creditor protection to be sold with no liability for their parent company's debts. This happened earlier this year with the sale of Varig's engineering and logistics subsidiaries. But to describe Varig's domestic and international airline operations as subsidiaries seems to be stretching a point.

If the sale fails, the only remaining option will be to declare Varig bankrupt and close it down. That is what TAM and Gol, its main Brazilian competitors, would probably most like to see happen, as they would be free to pick up its routes with no risk of debt contamination.

One way or another, Varig's services seem sure to be maintained. It has sold 30,000 tickets to Europe for the World Cup soccer tournament, which begins the day after Thursday's sale. Whatever the government's role in the affair - and it has so far been admirably hands-off - it will certainly wish to avoid any share in the blame for upsetting that many fanatical patriots.

To the Hague

The next chapter of the controversial saga of the pulp mills under construction in Uruguay, on its border with Argentina, is about to unfurl. After the disappointing collapse of bilateral negotiations between the neighbouring governments, unable to settle the squabble that blew up over complaints from Argentines that the mills would cause pollution, the argument has been taken to the International Court of Justice in The Hague, where proceedings begin on Thursday.

Argentina, which filed its case on May 4, hopes to prove that by "unilaterally" giving the go-ahead for the construction of the cellulose plants, Uruguay breached the international treaty governing the Uruguay River that separates the two countries and on whose banks the mills are being built.

Developments will be watched closely by the companies building the plants: Finland's Botnia and Spain's Ence. With a combined value of over $1.7bn, the project amounts to 10 per cent of Uruguay's gross domestic product, and will be the largest foreign investment in its history.

Lavagna breaks his silence

Former finance minister Roberto Lavagna's recent return to the limelight of Argentine politics is irritating the government, but delighting its critics, who have been worrying that a hopelessly fragmented opposition has no chance of putting up a fight against the overwhelming popularity of President Néstor Kirchner.

No sooner had the apparent start of Mr Kirchner's 2007 re-election campaign - a massive rally on May 25 in central Buenos Aires, the largest show of public support for his government yet - caused a media feeding frenzy than Mr Lavagna broke his media silence for the first time since he was ousted from the cabinet late last year.

The criticisms of the independently-minded Mr Lavagna - whose popularity stems from being credited as the architect of Argentina's extraordinary economic recovery following its 2001 collapse - touched a nerve in the government. Morevoer, Mr Lavagna is openly cavorting with opposition politicians and giving public talks to underline such sensitive issues as the importance of respecting institutions.

Together with attacks on the government's cronyism and statism, and questioning such drastic measures as its controversial ban on beef exports earlier this year, Mr Lavagna's behaviour suggests his political ambitions are far from over.

All of this has triggered rabid speculation about his designs on the presidency. Judging by the jilted and unified reaction of the party faithful - not least Felisa Miceli, his successor and former underling, who suggested he should be more "humble" - this threat is being taken seriously. The main opposition leaders, Elisa Carrió and Mauricio Macri, have also been quick to mark their distance.

For now, Mr Lavagna's lips are sealed - even if many, such as former president Raúl Alfonsín, are openly supporting his candidacy. But one thing is for sure: Argentine politics has just become much more interesting.

Lula on a roll

Brazil's presidential election in October is looking more and more like a foregone conclusion. This, at any rate, is how president Luiz Inácio Lula da Silva is behaving. Emboldened by first quarter GDP domestic product figures showing the economy well on track to meet the government target of 4.5 per cent growth, he has taken to taunting the opposition. "I just hope they can learn to be as democratic as me and get used to losing," he said last week. (Mr Lula da Silva won the presidency four years ago at the fourth attempt.)

The latest poll from Ibope backs his optimism. If the election were held now, he would win at the first round with no need for a second round run-off - the only hope for Geraldo Alckmin, the increasingly lacklustre candidate of the opposition centrist PSDB.

Six months ago, this scenario was unimaginable. Voters had turned from Mr Lula da Silva in disgust at the alleged cash-for-votes scheme with which his leftwing PT bought support in Congress. They have since forgotten all about it, while Mr Lula da Silva claims it never happened. Last week he said he hoped Mr Alckmin's television campaign would use footage from congressional inquiries into the affair so that voters could witness the "torture" to which his supporters were subjected.

As Celso Ming, columnist at the Estado de S. Paulo, points out, the opposition has no response. Its problem, he argues, is its failure to grasp the essential truths that Mr Lula da Silva has understood since the last election campaign. Corruption doesn't matter. Even economic growth doesn't matter. What matters is inflation. The lower the rate of inflation, the greater the spending power in the pockets of the poor and the greater the popularity of "their" man, Mr Lula da Silva. This is why the central bank has been able to keep interest rates so high in spite of howls of protest from all sides. As a result, consumer price inflation is within the target of 4.5 per cent for this year.

David Fleischer, a political scientist in Brasília, points out the size of the advantage that low inflation has delivered to the president. In a Datafolha poll at the end of May, voters were divided into those earning up to R$700 (US$306) a month (about half the population), between R$700 and R$1,750 (another third of the population), and above this amount (the wealthiest sixth). Dividing them further between four regions of the country produced twelve blocks of voters. Mr Alckmin led among the richest in the south and south-east and tied with the president among the richest in the north-east. Everywhere else, Mr Lula da Silva is romping home.

Notes by Richard Lapper, Adam Thomson, Jonathan Wheatley and Benedict Mander

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