Among the slew of legislation launched as part of Brazil's new economic growth programme, or PAC [Programa de Aceleração do Crescimento], is a bill expected to be signed into law this week by president Luiz Inácio Lula da Silva. It will set up a forum to discuss changes to Brazil's bankrupt public pensions system, widely regarded by economists as the country's single biggest impediment to growth.

Agreeing to talk about the problem might be a good start for an incoming government. But Mr Lula da Silva - whose second mandate began on January 1 - is now in his fifth year in power. The forum is likely to take at least six months to produce proposals which, if they have any teeth, will require approval by three fifths of the members of Brazil's fractious Congress. This is not a "concrete step", as Mr Lula da Silva described it when he introduced the plan on January 22. It suggests that pensions reform is unlikely to get much further than labour reform, another big problem identified by most economists, which is not on the government's agenda. The PAC is a modest programme of public works which may stimulate some extra growth in the economy. It is not a programme of government and should not have taken the place of one.

February 19: Generous Lula Edited by Richard Lapper

Last week's meeting in Brasília between presidents Luiz Inácio Lula da Silva of Brazil and Evo Morales of Bolivia was tinged with farce before it began. Mr Morales has been under increasing domestic pressure to deliver concrete benefits from his "nationalisation" of foreign assets in Bolivia's natural resources industries and threatened to cancel the meeting unless Brazil promised to renegotiate gas supply contracts with Petrobras, Brazil's state-controlled oil group, during his visit.

Brazilian diplomats described such tactics as "childish" and "amateur" and insisted any renegotiation would take place on a strictly commercial basis - and that Petrobras's contract would stay in force unchanged until it expired in 2009.

Instead, though, negotiations took place president-to-president and Mr Lula da Silva, citing the need to be "generous" to Brazil's much poorer neighbour, agreed to pay more for Bolivian gas. Just how much more is unclear but the Bolivians, who wanted to increase the price to Brazil from $4.20 per million British thermal units to $5.00 - the price agreed recently with Argentina - appear to have got at least half of what they wanted. (The basic price is to stay the same, but Petrobras will pay extra for premium gases included in the mix it receives.)

The details will emerge in coming days. What matters now is that for geopolitical reasons, Mr Lula da Silva has intervened and torn up a contract signed between two commercial partners. To investors already jittery about regulatory uncertainty in Brazil, that will be one more reason to stay away.

Death in Rio

The horrific murder of a six-year-old boy in Rio de Janeiro has thrown a shadow over this year's Carnaval celebrations. Predictably, because of the involvement of a 16-year-old in the killing, there has been a chorus of demands for changes to Brazil's penal code, under which nobody under 18 years of age may be sentenced to more than three years in detention.

The problem of crime in Brazil is beyond the reach of such simple fixes, even if they were effective in themselves. But it is not beyond the reach of well-crafted policy. Some isolated local examples show the effectiveness of simple measures, such as closing bars at 11 pm (which has helped slash the murder rate in Diadema in greater São Paulo). Other shortcomings of the existing security apparatus cry out for change, such as the anarchic structure of the country's overlapping police forces, which encourages rivalry, inefficiency and confusion instead of co-operation, the corrupt and incompetent prisons services, or the dysfunctional judiciary. Unfortunately, to tackle the vested interests that work against change would require courage, determination, vision and leadership - not the qualities that most stand out among Brazilian politicians.

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

Brazil: divisions and delays

President Luiz Inácio Lula da Silva of Brazil looks likely to miss another self-imposed deadline on Friday, March 2, the date by which he has said he will name the ministers to make up his government during his second four-year mandate, underway since January 1.

Following his landslide re-election victory in October, Mr Lula da Silva said he would name his ministers in time for his re-inauguration. But, having taken on the difficult job of sharing out power among his coalition partners in Congress, he decided to delay the announcement until after federal deputies and senators elected presidents of the two houses of Congress on February 1. His reasoning was that only then would the political landscape take shape but, after two pro-government candidates ran in the lower house, the election turned acrimonious and has left different wings of his coalition at loggerheads. Hence the second delay until after last week's Carnaval and, now, until March 2. But press reports suggest a fourth delay is likely, until after the national convention on March 11 of the catch-all PMDB - the biggest party in Congress and, supposedly, the key to governability during Mr Lula da Silva's second term.

But the PMDB is notoriously fractious and its internal divisions, added to those between parties in his coalition, are only exacerbating the president's difficulties. Meanwhile, several ministers are treading water (some literally, on holiday) waiting to see whether they still have a job. But if the second Lula mandate is to deliver its promise of 5 per cent annual growth, it had better get moving.

President George W. Bush lands in São Paulo on Thursday - the first stop in a week-long trip that also includes Uruguay, Colombia, Guatemala and Mexico - with a plan for Brazil and the US to jointly promote ethanol and other green fuels.

The idea is a good one. Together Brazil and the US produce 70 per cent of the world's ethanol. Promoting the fuel's use would reduce dependency on expensive imported oil. A viable green fuel industry would create jobs and alleviate poverty. And because ethanol is a cleaner fuel (produced from corn in the US, sugar in Brazil), it would bring environmental benefits.

And the plan may bring political benefits too. By providing a new and dynamic economic dimension to US relations with Brazil, it could help underpin relations between the two countries and inject an element of stability in a polarised and increasingly fragmented region.

The disappointing thing, though, is that the plan looks relatively modest, with the US directing only a few million dollars of spending to the initiative. All told, initial funding - including contributions from the US and Brazil, as well as the multilateral banks - is likely to be less than $25m, and the beneficiary countries will consist of a narrow group of oil-dependent US allies in the Caribbean Basin, such as El Salvador, Honduras, Guatemala and the Dominican Republic.

As Richard Lugar, the chairman of the US Senate's Foreign Relations committee, and José Miguel Insulza, secretary general of the Organisation of American States, suggested in an interesting piece in the Miami Herald, the two countries could usefully promote a worldwide programme of investment, training and research to build biofuels production capabilities.

Such a programme might be linked to the International Biofuels Forum - a broader international initiative designed to promote green fuel, involving China, the EU, South Africa and India, as well as the the US and Brazil. In addition, though, if a global market in ethanol is to become a reality, it must make sense for the US to start reducing the tariff barriers that limit Brazilian exports to the US.

Market fall-out

Latin America was certainly hit by last week's blow-up in international financial markets, with Brazilian and Mexican shares among the assets that suffered the sharpest falls last Tuesday.

Even so, to date at least, the losses are still relatively small, bearing in mind the scale of the gains in Latin American stock and bond markets in the last three to four years.

By the end of the week, for example, average bond spreads were 20 or 30 basis points wider than they had been at the beginning of the week, while stock prices - measured by the MSCI index - were 8.5 per cent lower. What's more, even if risk aversion were to become more pronounced, the region's generally healthy fiscal and current account positions means it is less vulnerable than other emerging markets (notably those eastern European countries with big current account deficits).

That said, however, if fears about growth in China really do materialise and commodity prices start to weaken, South American markets in particular will be exposed.

On the face of it, the new interest that President George W Bush has shown in themes like social welfare and energy co-operation ought to be welcomed. Mr Bush's recognition that significant numbers of Latin Americans have been excluded from the benefits of globalization represents an important first step in developing a policy that can counter the appeal of Venezuelan President Hugo Chávez's populism in poorer parts of the region.

His enthusiasm for a new energy alliance with Brazil is also a policy that has strong potential. Indeed, these are precisely the areas that the US needs to prioritize in order to develop a more "positive agenda" towards the region, one of the recommendations of a perceptive report on US policy towards Venezuela published recently by Washington-based Inter-American Dialogue.

Unfortunately, however, the resources being dedicated to the new approach are too small to make a real difference. And in the case of the US offer on primary health care the gesture is so weak that it may do more harm than good. True, the efforts of Venezuela and Cuba may well be unsustainable but in the short term they compare favourably with what Mr Bush is offering: a US naval vessel delivering emergency style assistance in the ports of eleven poor countries.

And, as this column pointed out last week, the green fuel initiative is also too timid. Last week's meetings in São Paulo confirmed that the sizeable tariffs and subsidies protecting US ethanol producers remain off the agenda.

Lula's cabinet delayed again

Will Luiz Inácio Lula da Silva, Brazil's president, ever actually name his cabinet for his second term in office, under way since January 1? Since he won re-election in a landslide last October, he has delayed the announcement at least five times. With what seemed to be the final hurdle out of the way a week ago - internal elections in the catch-all PMDB, whose support in Congress the president badly needs - the first names emerged last week. The PMDB, to its surprise and delight, is to get five big ministerial jobs - an outcome described by Michel Temer, party president, as "a spectacular result".

But the delays weren't over yet. Due to be sworn in on Monday, Odílio Balbinotti, the PMDB's new agriculture minister, resigned from a job not yet his on Saturday. The reason: media outcry over the fact that the Supreme Court is investigating him for fraud (something that seems not to have bothered Mr Lula da Silva during the four months he had reportedly had him in mind for the job). The credentials of his most likely replacements may not be much better.

One of the ironies of all this is that the president appears to have solid support in Congress, with the opposition in increasing disarray. But his government will have to get working very soon if it is to stand any chance at all of delivering the 5 per cent growth it has promised.

Edited by Jonathan Wheatley, Brazil correspondent

Brazil's president Luiz Inácio Lula da Silva will meet Italian prime minister Romano Prodi in Brasília on Monday and US president George W. Bush at Camp David on Saturday in two more attempts to drive forward what is becoming Brazil's big strategic issue of the moment: opening new markets for ethanol and other green fuels.

Brazil is attracting billions of dollars in foreign and local investment in green fuels and is leading efforts to encourage production in other countries. Mr Lula da Silva hopes to reach agreement on a deal between Petrobras, Brazil's state-owned oil group, and ENI of Italy on joint biodiesel projects in Angola and Mozambique.

On Saturday, he hopes to make further progress on the agreements reached during President Bush's recent swing through Latin America. US diplomats have stressed they do not want relations with Brazil to become too focused on ethanol - suggesting continued resistance to dismantling US tariffs and subsidies that keep imports of Brazilian ethanol to a minimum.

But Brazilian diplomats say they are willing to make concessions within the current Doha round of world trade talks on Brazil's own barriers to industrialised goods and services, so the leaders may be able to cement their increasingly friendly relations with something that looks like progress.

Argentina's energy bust-up

Last week's bust-up between the Argentine government and Petrobras, Brazil's state-owned oil group, was a sharp reminder that the problems besetting Argentina's energy sector have not gone away.

Sérgio Gabrielli, Petrobras's chief executive, was voicing concerns shared throughout the industry when he said investment was being discouraged by a continued freeze on energy prices - a result of the 2002 financial crisis and an attempt to control inflation that last year was almost 10 per cent. Industry leaders say it makes more sense to invest elsewhere where prices are significantly higher. But most are afraid to criticise the government's distortionary policy openly, despite the fact that Argentina's oil and gas reserves are rapidly dwindling while a fast-growing economy and bargain prices mean demand for energy is higher than ever. Executives keep quiet for good reason: planning minister Julio De Vido tersely countered that Petrobras "will see its contracts seriously affected" if it fails to invest enough.

Meanwhile, President Nestor Kirchner's recent complaints that Repsol-YPF is failing to invest enough has prompted renewed speculation that the government plans to buy back part of the formerly state-owned oil company - perhaps as much as 20 per cent, worth around $3bn.

The government denies it has any such plans. But there is a good chance that local business leaders close to government could buy a share instead. That would soothe concerns over foreign ownership of Argentine companies after foreign investors flooded in during the untrammelled liberalism of the 1990s. It might even lead to greater investment in exploration and production - without which there is an increasing likelihood that in the next couple of years Argentina could become a net importer of energy.

An end to Brazil's aviation crisis?

Finally, some action. President Luiz Inácio Lula da Silva has ordered that the country's air traffic controllers' demands be met after the controllers - most of whom are sergeants in the air force - went on hunger strike, then stopped work altogether on Friday evening, bringing Brazilian aviation to a total halt. The resulting chaos - in which one passenger died of a heart attack - may at last resolve the state of permanent near-crisis in place since September, when 154 people died in a mid-air collision that exposed serious shortcomings in air traffic control and in airport infrastructure.

Mr Lula da Silva has promised a solution by Tuesday, to avert more chaos over the Easter break, threatened by controllers if the government fails to keep its word. Yet their demand - demilitarisation and better pay - is a first step that should have been taken months ago towards solving the sector's long-term problems. An overhaul of Infraero, the government-controlled company that runs Brazil's airports, remains nowhere in sight.

Despite plenty of warnings, the government was caught off guard by Friday's events. Most directors of ANAC, the new civil aviation authority, were at a wedding. The defence minister, a personal friend of Mr Lula da Silva's who is responsible for the mess, left Brasília with the hunger strike already under way for a personal engagement in Rio de Janiero. It is time the farce ended, before more people die.

Labour reform in Brazil - too good to be true?

Business leaders in São Paulo say "strong rumours" are circulating about government plans to cut payroll charges on low-paid workers in a bid to bring small and micro enterprises into the formal economy. More sweeping deregulation would be better but such a move would nevertheless give a powerful boost to growth at the heart of the economy's most dynamic sector.

Government sources say concrete plans are a long way off and, so far, the rumours are little more than wishful thinking. The tiny amount of detail to have emerged suggests the kind of tinkering the government tends to prefer over root and branch reform: the salaries of workers earning up to twice the minimum monthly wage of R$380 (US$190) would be exempted from part of the social security and other charges that add about 60 per cent to the cost to employers of paying them (and up to 100 per cent in the case of higher-paid workers).

This is a clear distortion and a disincentive to paying higher wages. But it would have the advantage of attracting millions of workers into the formal economy. About half of all workers in Brazil are estimated to be outside the formal economy, paying no taxes and receiving no employment or pension benefits. The vast majority are in the low-paid sector that the measure would address. If successful, it might even boost government revenues to the extent that labour charges could subsequently be reduced across the board. That, unfortunately, really does sound like wishful thinking.

Carrefour, the French supermarket group, is set to retake the lead in the Brazilian market, a position it last held in 2000. Press reports suggest it may pay as much as R$2.5bn (US$1.25bn) for Atacadão, a Brazilian cash-and-carry retailer. The deal would add sales of R$4.5bn to R$5bn to Carrefour's R$12.9bn last year, putting the French group ahead of Brazilian chain Pão de Açúcar, with R$16.5bn, and well ahead of Wal-Mart of the US, its long-time rival for second place, also with R$12.9bn.

Brazil's retail sector has been consolidating for several years. New consumers have entered the market thanks to consistently low inflation, especially for foods, and to income-transfer programmes that have boosted the spending power of the poor. But the market leaders pursue contrasting strategies. Pão de Açúcar aims for the middle classes, while Wal-Mart has had mixed success in targeting the poor. If it buys Atacadão, Carrefour will move deeper into "hard discount" territory.

President Luiz Inácio Lula da Silva has done nothing to hide his growing frustration at delays caused to much-needed investment in infrastructure by Brazil's cumbersome environmental licensing process. Now a controversial proposal is before Congress that would take final say away from Ibama, the government's environmental agency, and give it to the president himself. Ibama would continue to evaluate projects but emit opinions rather than permits.

The bill was presented - in what he says was a personal rather than professional capacity - by Jerson Kelman, director general of ANEEL, the electricity industry watchdog. It already faces stiff resistance but, if it is approved, it will almost certainly be used to kick start two big hydroelectric dams on the Madeira river in the Amazon reason. Ibama has been evaluating the projects for almost two years and shows no sign of reaching a conclusion. Environmentalists are particularly concerned about species that exist only in the ecosystem the dams would most affect. But Mr Lula da Silva reportedly told a meeting last week that the country's economic progress could no longer be held up by endangered fish.

A conservative church

The Latin American Bishops' Conference doesn't meet very often and gatherings - which take place every ten to 15 years - can be pretty significant. Most famously, the Medellín conference of 1968, for example, marked the rising influence of the so-called theology of liberation, paving the way for a stormy period in which radical priests were often identified with guerrilla movements and left-wing governments.

The conference that will take place this week in Aparecida, São Paulo - which coincides with the visit of Pope Benedict XV1 to Brazil - will define a very different direction, reinforcing a trend towards much more conservative stance in recent years.

That is not to say that the Pope is not worried by the region's poverty and social inequality. Indeed he is expected to endorse the church's social work, such as that undertaken by Brazil's Pastoral da Criança. But he is a fierce critic of the more explicit political involvement advocated by liberation theologists and an even sterner conservative on issues like abortion, gay marriage, stem cell research and a string of other moral issues.

His posture on these latter questions is likely to ring hollow with many Catholic Latin Americans who happily ignore the church's teaching on contraception and even favour decriminalisation of abortion. That is particularly true in easy-going Brazil, where President Luiz Inácio Lula da Silva has recently called for an "end to hypocrisy" on contraception and where health minister José Gomes Temporão favours a referendum on abortion.

But social conservatism may well serve the church's interests as it battles to preserve its influence in the face of continuing recruitment by evangelical churches. As new research by the Fundacão Getúlio Vargas pointed out last week, nearly 18 per cent of Brazilians profess to be Protestants, compared with only 5.2 per cent in 1970. The number of Catholics has stopped falling, but evangelicals and especially conservative Pentecostal churches continue to make big inroads, especially in poorer, more marginal urban areas.

Broken patents ?

So, after coming repeatedly to the brink in its patent battles with international drugs companies, Brazil has finally broken a patent - or has it ? Friday's decision to issue a "compulsory license" on Efavirenz, Merck's anti-AIDs drug, came after several months of fruitless efforts to press the company to reduce the costs of a drug used by more than 70,000 Brazilian AIDs sufferers. The company's offer - a 30 per cent discount - fell short of what health minister José Gomes Temporão was demanding.

But one senses that is not the end of the story. The savings obtained by buying generic versions of the drug from India amount to $30m per year for the next six years or so, but if Brazil were to be seen as a patent buster, the costs could be much higher. The Brazilian way is to avoid points of no return. If Merck were to offer a bigger discount, there could still be a solution even at this late stage in the affair.

Bank of the South

While the crisis continues at the World Bank, the future of Banco del Sur, the all-Latin American development bank being promoted by Venezuela's President Hugo Chávez seems to get brighter and brighter.

Officials from Venezuela and five other countries - Bolivia, Ecuador, Brazil, Paraguay and Argentina - met last week in Quito and will follow up with sessions in Rio de Janeiro and Asunción over the next month or so. If all goes according to plan, Banco del Sur could be launched by the end of June, much earlier than seemed to be the case only a few weeks ago.

Brazil's commitment to the organisation is still questionable, but Argentina seems seriously interested in building an institution that would make it less dependent on Washington. Venezuela is flush with funds as a result of the recovery in the oil price and President Chávez, eager to make maximum propaganda advantage from the misfortunes of Paul Wolfowitz, the World Bank president , is anxious to spend them as rapidly as possible. Banco del Sur may not amount to much in the end, but there can be no doubting Mr Chávez's determination to make it happen.

In 1943 the Getúlio Vargas government introduced Brazil's labour code in emulation of Mussolini's Italy. Its extraordinarily generous provisions add the equivalent of 60 to 100 per cent of workers' pay to the cost of employing them. These and other restrictions on hiring and firing have pushed more than half of all jobs into the informal economy where employers and workers pay no payroll taxes and workers receive no benefits or protection whatever.

Business people and economists have been calling for change for decades. Recently, as the strengthening currency has increasingly exposed the inefficiencies that destroy the competitiveness of Brazilian business, such demands have become harder to ignore. The president, at last, may be listening. Last week he said not only that labour reform was on the way, but that the time had come to move forward on tax, political and pensions reforms, too. This is exactly what most economists say is needed to boost Brazil's growth ahead of the torpid 3 per cent annual rate of recent years.

But don't wait for progress standing up. Just three months ago Dilma Rousseff, Mr Lula da Silva's chief minister, told the Financial Times that labour reform was off the government's agenda. More recently, the new labour minister made it clear that removing workers' rights was not a possibility. The reaction of Força Sindical, the more moderate trades union confederation, to Mr Lula da Silva's comments, was to call them "absurd". Nor is there much popular sympathy in Brazil for what are regarded as "neo-liberal" (close in meaning to "diabolical") ideas.

Even if progress comes, it will be piecemeal. The government's reaction to the stronger currency last week was to propose targeted relief from labour costs to those sectors most affected by the real's valuation - especially footwear, furniture and textiles. This kind of tinkering only creates more distortions and uncertainties. What is needed is a clean sweep.

Jonathan Wheatley

Moody's is next - but when?

In the past fortnight Fitch Ratings and Standard & Poor's have brought Brazil within a whisker of investment grade. But while Fitch left the country's foreign currency debt on a neutral outlook, Standard & Poor's gave it a positive outlook (and boosted local currency debt straight into investment grade). "They had to do that just to be different," said one insider, who admitted to having won a bet on how Standard & Poor's would manage to follow Fitch's lead, only differently.

While nobody should doubt that the agencies believe firmly in their own opinions, the insider's comments confirm what everybody knows. Ratings agencies are like fashion conscious teenagers: they want to be different, but not too different.

So how will Moody's Investor Service respond? Leapfrog the others straight into investment grade? Do nothing for eight months? What no longer seems in doubt is that Brazil will get its investment grade by next year at the latest, reforms or no reforms. The agencies' shared urge to be first is one reason (in addition to the unacceptable conflict of interest) why this correspondent has had to turn down bets that the upgrade will come before year end.

Jonathan Wheatley

This week's issue of Veja, a news magazine, claims that a lobbyist working for Mendes Junior, one of Brazil's biggest construction companies, paid R$16,500 a month to a former journalist with whom Mr Calheiros had a daughter, now 3-years-old. Mendes Junior denies any wrongdoing and says the payments were a personal matter of its employee. The lobbyist admits making the payments but refuses to say where the money came from. Mr Calheiros denies ever receiving back-handers from anybody and says the money was his, although he has yet to explain why the payments were made in this way.

The accusation comes together with the latest revelations of the "construction mafia" case currently unfolding - the alleged mastermind of which is a personal friend of Mr Calheiros's - that has already resulted in several arrests and the fall of one minister. The scandal is part of a widespread malaise that, according to a recent study, costs Brazil about R$1.5bn a year.

This is at best a guess. It fails to measure the true cost of a system where relations between the public and private lives of those in power are promiscuous, where status is measured by impunity from justice, and where standards of conduct, from politicians in Brasília to the police on the street, demonstrate to citizens everywhere that if you can get away with it, you should go ahead.

Jonathan Wheatley

Evidence continues to mount that the uncompetitiveness of Brazil's economy exposed by its steadily strengthening currency is having far-reaching effects on industry. As the real heads inexorably, it seems, towards R$1.80 to the dollar, poor infrastructure, rigid labour laws, stifling bureaucracy and a bewildering tax regime are making it harder and harder for manufacturers to compete both at home and abroad. Many are importing inputs they previously made themselves; others are shipping their factories overseas.

Three Brazilian companies will sign a letter of intent with the governor of Catamarca, Argentina, this week, on investments of $60m in footwear, clothing and coachwork factories expected to provide jobs for 6,000 people. The province's generous tax breaks will have helped make up their minds. But if Brazil's government wants to stop the flow of jobs, taxes and development overseas, it should think again about its unwillingness to tackle the politically difficult reforms it has chosen to ignore.

Jonathan Wheatley

Brazilian senators are expected to decide this week whether to follow the advice of their ethics committee and ditch an inquiry into alleged misdeeds by the Senate president, Renan Calheiros of the catch-all PMDB. If they do, it will be the most brazen display of collective brass neck to which Brazilians, already used to such displays, have yet been subjected.

Mr Calheiros has admitted that an employee of a construction company for two years made generous monthly payments to a former journalist with whom he had an extra-marital affair (and a daughter, now aged three). He says the money was his and he has therefore done nothing wrong. But questions were raised over how he could afford this on his salary of R$12,000 ($6,282) a month - less than the monthly payments at their peak. He pointed to income from three cattle farms and presented documents to prove it. But a report on TV Globo's Jornal Nacional cast serious doubt on the documents and interviewed alleged buyers of the senator's cattle who claimed never to have done business with him.

"I would put my hand in the fire for Renan Calheiros," said fellow PMDB senator Pedro Simon. "Well, not put my hand in the fire. But I trust him." Other displays of support have been less convincing. Mr Calheiros should just go. Unfortunately, the way things are in Brasília, there is really no reason why he would.

Jonathan Wheatley

The UK is not expected to extradite Mr Berezovsky, who has asylum status, nor the other two, who are UK citizens. Nor, failing a lifting of the impunity normally enjoyed in Brazil by those who enjoy power, will much happen to the Corinthians managers and their lawyers accused of joining their overseas associates in an alleged criminal organisation.

The losers, unsurprisingly, will be Corinthians supporters. The judge that issued the arrest warrants also blocked bank accounts held by MSI in Brazil - a principal source of money for the club.

In an added complication, the Lausanne-based Court of Arbitration for Sport simultaneously ruled that Corinthians must pay €8m to Lyon football club of France for a player bought by MSI for Corinthians who was then injured and unable to play. If Corinthians does not pay up - and it is hard to see how it can, barring the appearance of some white knight or other surprise - it faces being expelled from top division football.

The Corinthians affair presents Brazilian administrators with a dilemma they are being forced to confront with increasing frequency: face up to the short-term costs of dealing with corruption; or accept the long-term costs of doing nothing. No prizes for guessing which course the governors of Brazilian football will chose.

Jonathan Wheatley

It is hard to decide which of the government's actions following the worst disaster in Brazilian aviation history most typified the inadequacy of its response to a crisis that has lasted for at least ten months.

Was it the failure of president Luiz Inácio Lula da Silva to appear in public until three days after the accident, or to issue any statement at all within the first four hours (his message of condolence arriving after, for example, that of president Néstor Kirchner of Argentina)? São Paulo state governor José Serra went to the scene immediately, following the rescue work and talking to the press. Surely, Mr Lula da Silva should have done the same.

Was it the repeated denial of responsibility by Walter Pires, the minister of defence who is in charge of civil aviation, who should have departed after last September's mid-air collision between a Gol Boeing 737 and an executive jet in which 154 people died, but who has been kept in the job?

Was it the sight of leaders of Anac, the civil aviation regulator, being given medals for services to air travel by vice president José Alencar three days after the accident, instead of the reprimands or dismissals they deserve?

Or was it the spectacle of Marco Aurelio Garcia, the president's special advisor, caught on camera celebrating the television news of a possible mechanical fault in the crashed aircraft, that potentially deflected some of the responsibility away from the government?

Whatever the true cause of the accident, it was a disaster waiting to happen. Aircraft have been slipping around on the runways at São Paulo's city centre airport for months, before and after they underwent repairs this year. The dissatisfaction of air traffic controllers with their equipment and their military commanders is notorious. While passenger terminals have been smartened up around the country, passenger safety has been neglected. The desperate need in Brazil for more effective government has never been clearer.

Jonathan Wheatley

While many in Brazil agree that their currency is becoming uncomfortably overvalued, there is little agreement about what has been driving its appreciation. The real has advanced against the US dollar from R$3.95 at its weakest in late 2002 (when many investors feared that the incoming government of left-winger Luiz Inácio Lula da Silva would overspend the country into default) to R$1.86 last week. Some say the cause is the export surge from global demand led by China for Brazil's commodity exports, producing regular trade surpluses of more than $40bn a year. Some say it is Brazil 's very high interest rates, attracting so-called carry traders (who typically borrow in Japan, where interest rates are low, to invest in Brazilian government paper).

Analysis by Walter Molano of BCP Securities, a Connecticut broker, shows that there is a third factor: the extent to which Brazilian companies have been raising debt on international markets. This borrowing helps explain how Brazil achieved an $18.7bn capital account surplus in a year when government borrowing was minimal and net foreign direct investment negative to the tune of $8bn (because of the scale of CVRD´s $18bn investment in Inco, the Canadian miner). In other words, while the oceans of liquidity on world markets have contributed to the strong currency and made life hard for many companies, that same financial abundance provides the means for some of them - at least the most dynamic ones - to adapt.

Jonathan Wheatley

Last week's purchase of two regional mobile phone companies by Vivo, Brazil's biggest mobile operator, heralds a new phase in the consolidation of Brazilian telecoms that has been going on since privatisation in 1998. It is also a significant victory for Telefónica of Spain - which controls Vivo in a joint venture with Portugal Telecom - over its Mexican rivals, Telmex and América Móvil, controlled by billionaire entrepreneur Carlos Slim. The two sides have been slugging it out for years in a struggle for domination in Brazil and across the region.

A new player may soon emerge to challenge their hegemony in Brazil. Sadly, it is not one likely to further the advance of a well-regulated, freely-competitive market. It would result from a merger of Oi (formerly Telemar) and Brasil Telecom, two big fixed and mobile operators in which Brazilian investors have a large share of control.

Under current regulations such a merger would be impossible. But the government has not only expressed its interest in the emergence of a "national champion" to take on the foreigners. It has also signalled its intention of taking a "golden share" in such a merged company. Current regulations, it seems, may soon be swept aside - a further indication of the government's eagerness to call the shots in the sector, and of the near impossibility of relying on such regulations as exist. Spaniards, Mexicans and especially Brazilians should object.

Jonathan Wheatley

When Brazil's president Luiz Inácio Lula da Silva was booed at the opening of the Pan American Games in Rio de Janeiro last month, it was widely seen as a reflection of Rio's often out-of-kilter politics. After all, recent opinion polls have confirmed the president as the most popular in Brazilian history.

But the booing has continued at a series of regional events to launch investments under the government's growth acceleration programme. Some events in the series have been cancelled - notably one planned for Porto Alegre in the south, home to many of the victims of last month's air disaster. Protest movements have sprung up under slogans such as Eu também vou vaiar Lula ("I'm going to boo Lula, too") and Cansei ("l'm fed up") - the latter led by the national lawyers' association.

Behind them is what the president himself has called a "metastasis" of problems, most concerned with the government's continued difficulty in handling the crisis in civil aviation. Nelson Jobim, the new defence minister in charge of the industry, has already clashed in public with Dilma Rouseff, the president's senior minister and chief of staff, while a power failure at an air traffic control centre last week highlighted the depth of management problems.

But frustration is also rising at further revelations of government corruption (a fresh scandal emerged in the postal service last week, similar to the one that started the mensalão scandal two years ago) and at the Lula administration's failure to address obstacles to growth such as Brazil's complex and restrictive tax and labour regimes. "We're running into a big roadblock," says the head of a foreign multinational in São Paulo. Instead of hiding from the public, Mr Lula da Silva should heed the warning signs.

Jonathan Wheatley

But few in Brazil are alarmed. Guido Mantega, finance minister, said Brazil 's resilience to global financial market turmoil would hasten the approach of the country's long-awaited investment grade. "We've got dollars to spare," he said.

True, Brazil's foreign currency reserves of more than $150bn provide a useful cushion in an environment of diminishing liquidity. What's more, at a time when investors' main priority is to de-leverage themselves away from risky, illiquid securities, it is hard to imagine Brazilian assets falling into that category. A certain amount of contagion is inevitable. But Brazil is no longer in the firing line as it once was.

That is, if what we are seeing is limited to a liquidity crisis. But as Nouriel Roubini convincingly argues the world may now be heading into a solvency crisis. If that is true, the twin pillars of Brazil's relative recent prosperity - abundant liquidity and high commodity prices - will start to wobble. Complacency may not be the best approach.

The implications for the rest of Latin America seem to be pretty similar. Higher risk credits such as Ecuador and Venezuela did less well, but in general, Latin America survived unscathed from the sell-off, with Colombia's bonds and currency closely following Brazil. "The quiet and orderly erosion of debt prices contrasted with the landslide of negatives coming from the US and Europe," commented analysts at IDEA, the economic consultancy. Although, IDEA did point out that when European fund managers come back from holiday at the end of this month there could be more of an impact. That is because - according to IDEA at least - Europeans are more risk averse than their US counterparts.

Jonathan Wheatley and Richard Lapper

Far from being decoupled from the outside world, Latin America has followed Wall Street as one tram line follows another. Many foreign investors have been forced to pull money out of the region to meet obligations in other markets, sending Latin stocks, bonds and currencies tumbling along with others around the world. But contagion is not only about liquidity. Risk aversion has returned. As the crisis has developed, Argentina and Venezuela have been the hardest hit in the region. This should not be surprising, given inflationary pressures in both countries. Ecuador, too, has underperformed, reflecting the perceived risk of default.

Outflows threaten further trouble down the line. Brazil's real touched R$2.13 to the US dollar on Thursday, down from a peak of R$1.84 on July 23. It has since recovered a bit but seems unlikely to reach its recent peak any time soon. That is a loud warning bell on inflation. The strength of the currency has been a leading ally of the inflation-fighting central bank. It can no longer be relied on.

It doesn't stop there. Commodity prices have been wobbling for some time. So far, this is another symptom of investors' need for cash. But if that need persists, low prices will begin to threaten the region's commodity-based current account surpluses. Brazil, again, is in the front line. Its relative prosperity in recent years has been underpinned by global demand, led by China, for its commodity-based exports.

All these things happening at once are a clear threat to the region's new-found macro stability. If the US Federal Reserve and other central banks manage to contain the crisis, their impact will be limited: normality will return at a different level, with more realistic asset prices and a sounder assessment of risk by investors.

If volatility persists into coming months, however, the crisis will have longer-term implications. Trade balances and other fundamentals will deteriorate. Productive investment will be harder to find. Inefficiencies will become more evident. Risk aversion will become more pronounced. The region may not be as armour-plated as its leaders believe.

Jonathan Wheatley and Richard Lapper

The mensalão is back. Seventeen months after Brazil's attorney general concluded that members of government had formed a "criminal organisation" to bribe legislators for their support, the Supreme Court has brought charges against 19 of the 40 individuals identified in his report.

In fact, the mensalão had never really gone way. Nor is it really back.

It is not really back because, even if criminal proceedings go ahead (and the remainder of the 40 may yet be charged, too), it will be years before any punishments are handed down. If past experience is any guide, that will not happen or, if it does, it will happen only after the offences have elapsed (Brazil's statute of limitations, bizarrely, dating from the date of indictment rather than conviction, offering plenty of incentive to drag things out in court). Immunity, the root of so much corruption and injustice in Brazil, is likely to prevail.

Yet the mensalão has not really gone away because the incestuous relations it typifies between public and private life remain all too present. This week, a senate committee may finally hand down a ruling on Renan Calheiros, the senate president accused of having private expenses paid by a construction company (although the FT has twice predicted his imminent departure in recent months, so don't wait standing up).

That he is still in the job beggars belief. He has already admitted that the construction company employee delivered cash to his extra-marital lover. Now he has confessed to taking an illegal loan to cover the payments (this being his explanation of the source of the necessary funds). Nevertheless, his immunity is all but guaranteed. He could at least have the good taste to go off and enjoy it in private.

Jonathan Wheatley

Financial markets took little notice of last week's news that Moody's, the ratings agency, had brought Brazil to within one notch of its longed-for investment grade rating.

Perhaps this was because it was already priced in. (Moody's move comes months after those of its rivals, Fitch Ratings and Standard & Poor's. Back then, one agency executive speculated that Moody's would manage to "be different" from the others - by waiting several months, he guessed. He was right. He couldn't have guessed that Moody's would go for the special cachet of acting in the slipstream of a major financial crisis.)

Then again, perhaps it was because of the damage done to ratings agencies' reputations by the US subprime mortgage crisis.

Or perhaps it was just because it doesn't matter. In spite of the lack of movement on all the micro-economic reforms the agencies have been calling for as conditions for further upgrades (tax, pensions, labour, etc.), everyone knows that the risk of a sovereign default in Brazil is already close to zero. Brazil will soon be a net creditor to the rest of the world. It has $160bn in foreign reserves. That is why it was so easily able to weather the latest storm.

Of course, if the crisis should result in a global downturn, then Brazil, as a commodities exporter, will be among the countries hardest hit. Nobody will pay much attention to the ratings agencies then, either.

Jonathan Wheatley

Mr Calheiros has been battling since May against a string of corruption allegations, beginning with the charge - that he admits to be true - that an employee of a construction company carrying out public works dependant on budget amendments under the senator's sway delivered cash payments to his extra-marital lover. A Senate committee voted last week to expel Mr Calheiros over the affair. On Wednesday he faces a second, decisive, vote on the Senate floor.

Unlike the committee vote, the floor vote is secret and Mr Calheiros probably has enough supporters to get him off the hook. He can count on help from the government - which depends for its Senate majority on an alliance assembled by Mr Calheiros - to make sure of that.

But the vote looks like being close. Were he to win by a small majority, his authority would be fatally damaged. And he would still have to face further inquiries based on increasingly damaging evidence. Rather than risk losing his political rights for eight years, he may chose to go quietly now - and return (like former president and now senator Fernando Collor de Mello) to fight another day.

Jonathan Wheatley

Some of those who voted against their consciences apparently did so in the belief that, once absolved, Mr Calheiros would keep his side of the bargain and take a leave of absence - neatly removing himself, handing the job to a government supporter (Tião Viana of President Luiz Inácio Lula da Silva's PT, the Senate vice-president) and avoiding a messy election for his successor, which would have been necessary had he been expelled.

But Mr Calheiros's brass neck is not for turning. The day after the vote - apparently unconcerned by the fact that he now faces three further corruption inquiries - he declared that the Senate had renewed its confidence in him and that he and he alone had the authority to lead it from now on.

Opposition senators say they will obstruct Senate business until he goes. If they do, they will cause serious trouble for the government. It needs three-fifths majorities in both houses of Congress to pass constitutional amendments to perpetuate the CPMF, a financial transactions tax delivering revenues equal to about 1.4 per cent of GDP, and the DRU, a measure that releases about 20 per cent of budgetary resources from earmarking.

This opens an intriguing prospect. Mr Calheiros, by his obstinacy, may deprive the government of vital resources, forcing it to deliver the much-needed spending cuts it has refused to contemplate. That really would be a silver lining. But don't bet on it.

Jonathan Wheatley

The central bank does not agree. In the minutes of its monetary policy committee meeting on September 4 and 5, when it slowed the rate of interest rate cuts from 0.5 to 0.25 percentage points (bringing the Selic rate to 11.25 per cent a year), it used unusually clear language to show its concern over returning inflation and signalled, in the interpretation of many economists, the end of interest rate cuts for the foreseeable future.

The government may think it has done what it takes to deliver sustainable growth, but it has not. Sound monetary policy is one thing. Loose fiscal policy is another. Even economists who predicted more than 6 per cent growth in the second quarter expect annual growth to fall back to 4 per cent in 2009, from about 5 per cent this year.

Without spending cuts to release money for investment, and without labour and other reforms to let the private sector deliver its enormous potential, Brazil will remain doomed to repeating its history of boom and bust.

Jonathan Wheatley

The saga of Renan Calheiros, president of Brazil's Senate, continues this week as the government battles to approve two vital budget measures in the face of what looks like daunting opposition in Congress.

Opposition senators, indignant that Mr Calheiros did not stand down after they absolved him of corruption charges, have threatened to obstruct passage of a bill perpetuating the CPMF, a financial transactions tax worth upwards of R$36bn a year, and the DRU, which releases about 20 per cent of budgetary resources from earmarking. The government had a tough job getting the bill through first stage approval in the lower house last week, in spite of its comfortable majority, and must still get approval for a slew of supplementary amendments. Doing the same in the Senate, where its majority is far from guaranteed, will be tougher still.

But the government need not worry unduly. The "opposition" it faced in the lower house was mostly from its own supporters. They have no objection to the CPMF or the DRU - in fact they love them both. During negotiations for their approval, the government released more than R$100m in budget amendments, mostly proposed by its supporters. Negotiations reportedly continue over allocation of a dozens of public-sector jobs - including director of international operations at Petrobras, the biggest publicly-traded company in Brazil - to be placed in the gift of legislators voting the government's way.

Whether it has to spend its own political capital or oceans of other people's money, the government will get what it wants in the Senate. After all, as one economist observed last week, it is not from Brazil's political class that anyone should expect moves to reduce the quantity of tax revenues and other perks available for divvying up in Congress.

Jonathan Wheatley