BRASILIA, March 18 (Reuters) - At the start of the year, few would have guessed that a “Chicago Boy” economist would win over Brazil’s leftist president, Dilma Rousseff.
But that’s precisely what her new finance minister, Joaquim Levy, appears to be doing.
After two months on the job, the 54-year-old Levy has grown closer to Rousseff and earned a place in her inner circle as she tries to pull Brazil’s economy out of a prolonged slump, government sources told Reuters.
With Brazil at risk of losing its coveted investment grade rating, Rousseff has embraced Levy’s push to rein in spending and raise taxes in a bid to restore fiscal credibility.
That is an about-face for Rousseff, a one-time Marxist rebel whose first term as president was marked by unchecked spending and heavy-handed intervention in the economy - policies that critics say have pushed Brazil to the brink of its worst recession in 25 years.
Levy wasn’t Rousseff’s first choice for the post but, to the surprise of many, he is rapidly gaining clout in Brasilia, advising her on matters beyond the economy and even leading talks with Congress, three government sources said.
“She listens to Levy like very few people in this government,” said an official who has worked with both. “He has produced results and that has increased her trust in him.”
What makes the partnership particularly unusual is the ideological divide between them.
Levy is a former International Monetary Fund official with a Ph.D. in economics from the University of Chicago, well known for its support of free markets and economic liberalism.
He has long been an advocate of smaller government - a view Rousseff derided as heartless neoliberalism when she campaigned for re-election last year.
When he served as treasury chief a decade ago, Levy’s focus on cost cutting put him at odds with Rousseff, who was President Luiz Inacio Lula da Silva’s chief of staff at the time.
The differences are still evident in closed-door negotiations on the size of the austerity measures, but Levy has so far proven persuasive.
“His views have prevailed at the end of the day,” said a finance ministry official involved in the talks.
Rousseff publicly defends the belt-tightening as a painful remedy to get the economy back on track but the measures have fueled popular discontent and some analysts and politicians question whether she has the will to see them through.
Rousseff and Levy share an important weakness. Both struggle with the political give-and-take needed to get things done in Brasilia and that could jeopardize the austerity measures, which face mounting opposition in Congress.
“Levy is a technocrat, not a politician,” said Thiago de Aragão of Arko Advice, a political consultancy in Brasilia. “He doesn’t have the political experience to deliver those tough messages carefully.”
That is a liability at a time when Rousseff, whose approval ratings are at an all-time low, faces a revolt from leaders of the biggest party in her ruling coalition, the PMDB.
They blame her for their inclusion in a probe of politicians implicated in a corruption scandal at state-run oil company Petrobras, and have vowed to oppose her agenda in Congress.
Still, Rousseff has increasingly used Levy to sell austerity to congressional leaders, a strategy that has had mixed results.
Many lawmakers view the former banking executive with mistrust, including members of Rousseff’s own Workers’ Party, who oppose the belt-tightening and worry it could hurt the party’s chances of winning a fifth straight presidential election in 2018.
Leftist lawmakers were up in arms after Levy said Brazil’s unemployment benefits scheme was “completely out of date.” In comments later criticized by Rousseff, Levy also called tax cuts during her first term a costly “stunt.”
Levy, who declined to comment for this story, is now only granting media interviews via email.
“Picking Levy may have won Dilma some points with the market, but he is not winning over the political class,” said a senior Workers’ Party senator, who declined to be named. “He is increasingly alone in his austerity push.”
Several other lawmakers voiced frustration with Levy, though none wanted to do so on the record.
Some of the discontent came to a boil earlier this month when the Senate threw out a presidential decree that would have raised payroll taxes.
The setback came only hours before Brazil’s top prosecutor asked the Supreme Court to open investigations into dozens of allied lawmakers accused of benefiting from kickbacks at Petroleo Brasileiro SA, as Petrobras is known.
Measures awaiting approval in Congress account for half of the government’s budget savings goal of 55 billion reais ($16.88 billion) this year. Investors worry that Congress could spoil proposed cuts to some pension and unemployment benefits, measures aimed at shoring up Brazil’s finances.
“You can’t do the entire fiscal adjustment ... without Congress,” said Luka Barbosa, an economist with Itau Unibanco. “You can’t keep cutting investment forever. You need Congress to change rules of mandatory expenditures.”
About 90 percent of Brazil’s expenditures are obligatory, meaning the government has little room to cut without congressional support for changes to the constitution, a non-starter in Brazil’s fragmented legislature.
Rousseff, known for deciding on the most minute details of economic policy, is relying on Levy to make those cuts and find a way out of Brazil’s economic rut.
“Levy may be erring on the communications front, but he is on the right track on the economic front,” said another government official. ($1 = 3.25 Brazilian reais) (Additional reporting by Luciana Otoni; Editing by Todd Benson and Kieran Murray)