Election Fears Harm Brazilian Economy

Brazil's presidential election does not take place until October, but investors are already voting with their feet at the prospect of victory for the leftwing opposition candidate, Luiz Inacio Lula da Silva.

The presidential contender from the Workers' party, better known simply as Lula, holds a commanding lead over Jose Serra, the ruling Social Democratic party candidate. The possibility that Lula, a former metalworker, will become leader of Latin America's most important economy has got the markets - which consider him a leftwing firebrand - rattled.

Stocks have tumbled and the currency, the real, has slumped in recent weeks. Last week, credit rating agencies - which assess the ability of borrowers to repay their debt - downgraded Brazilian debt. Moody's cut its outlook on Brazilian government debt to "negative" and Fitch downgraded its rating as well.

Investors fear that if Brazil goes off the rails, the rest of Latin America will descend into chaos as the economic contagion spreads. Although Argentinians are suffering terribly from economic turmoil and a once-proud country is reverting to a barter economy, Argentina's problems have not spread to the rest of the continent so far.

In Brazil's case, the markets appear to be getting ahead of themselves. As the International Monetary Fund points out, Brazil's economic policies are "by and large appropriate". While the Fund registers its usual concerns with inflation, public spending and government debt, it has given the Brazilian government high marks for its handling of the economy.

In releasing $10bn (£6.7bn) from a line of credit last week to deal with current market pressure, the IMF praised Brazil for taking the initiative and not waiting for developments to force it to act. This was consistent with the way Brazilian economic officials have acted in the last three and a half years, the IMF said.

But as the IMF noted, the markets are obviously concerned about the October elections and the kind of policies that will follow if wins. Lula has toned down his anti-market rhetoric in recent years and his party has won kudos for clean government in cities and states where it has won power. Yet investors are nervous about his more radical followers and the possibility of renegotiation of Brazil's large $90bn debt.

Investors should remember, however, that we have been here before. Lula has led the polls in previous presidential contests, only to falter at the last hurdle. Of course he might win this time, in which case between now and October, he will have to do his utmost to win the confidence of the money men, as well as his fellow Brazilians. Otherwise, he could inherit an economic mess that would have brutal repercussions for the rest of Latin America.

• Mark Tran is business editor of Guardian Unlimited.