About 900,000 federal workers yesterday rejected the government's offer to boost salaries by as much as 33 percent. The Confederation of Federal Employees is demanding the government double its 1.5 billion real ($521.2 million) proposal, said Vicente Neto, an official with the union.
Lula, whose support in congress has weakened since Epoca magazine published allegations of government corruption in February, faces criticism from his own supporters for failing to revive the economy. The former union leader has cut spending and brought down inflation to help restore confidence in Brazil's ability to keep up payments on $400 billion of debt.
``This is the first big test of the newly weakened Lula government,'' said Stracke, head of Latin America research at New York-based research company CreditSights. ``It certainly seems like the unions smell blood.''
Stocks, Bonds Fall
Brazilian stocks and benchmark bonds fell today after the inflation rate fell less than economists had forecast in March. The Bovespa stock index fell 2 percent to 22,606.56 at 2:35 p.m. in New York. The government bond due 2040 fell 0.7 cent on the dollar to 104.60, booting the yield to 10.56 percent, according to J.P. Morgan Chase & Co.
Lula, 58, a former lathe operator, has seen his approval ratings decline after the economy contracted last year and unemployment climbed.
Lula's approval rating slipped to 54 percent in March from 75 percent in the same month a year earlier, according to Ibope, a Brazilian polling company. Only 34 percent of Brazilians rated his performance ``excellent'' or ``good'' in the survey, down from 41 percent in December.
Brazilian wages have been undermined by inflation, which reached an annualized 17.2 percent, a seven-year high, in May last year. Brazilian consumer prices rose 0.47 percent in March from the previous month compared with 0.61 percent in February, the government's statistics agency said today. The March rate was higher than the 0.4 percent rise forecast in the median estimate of 17 economists surveyed by Bloomberg.
Lula may be tempted to give in to demands for more spending to revive the support of coalition partners, said Carlos Gandolfo, a partner at Pioneer Corretora de Cambio Ltda. in Sao Paulo, which handles about a third of the nearly $1 billion traded daily in Brazil's currency markets.
Allegations
Support in the governing coalition was undermined by allegations published in Epoca that an aide to Chief of Staff Jose Dirceu solicited campaign contributions for Lula's Workers' Party from an illegal lottery ring. Lula fired the aide and said the government would investigate.
``Lula's authority and power has been severely weakened by the scandal,'' said Alexandre Barros, president of Early Warning, a Brasilia-based political risk analysis company. ``He had already spent a lot of his political chips winning pension and other reforms last year and now he has little room for maneuver.''
The trailing 12-month budget deficit was equal to 4.75 percent of gross domestic product in February. Lula is trying to reduce the budget deficit to 2.8 percent of GDP from 5.2 percent last year.
Lula, who organized metalworkers unions in Sao Paulo in the 1970s, is resisting demands that he back pay increases exceeding as much as 75 percent and lift spending caps included in an International Monetary Fund loan accord. Brazil spends about two- fifths of its annual budget in salaries and pension for government workers.
``Until they solve the wage bill problem, they don't have much leeway on spending,'' said John Welch, senior vice president for Latin America research at WestLB AG in New York, who has been covering the region's economy since 1981.
Wage Offer
The government's plan offered state employees and pensioners pay rises of between 9 percent and 32 percent that will cost taxpayers 1.5 billion reais this year, an amount about equal to the savings the government said it could squeeze from changes to the state pension system last year. The government won't make a better wage offer, Planning Minister Guido Mantega said yesterday.
``To meet what unions want, they might have to cut spending in investment or other areas -- at the risk that voters will complain too,'' said Pedro Tuesta, an economist at 4Cast Inc. in Washington. ``It's a very negative signal of weakness.''
Luiz Marinho, president of the United Workers Central, Brazil's largest union, and a longtime friend of Lula, said he would endorse a new strike by civil servants unless the government raises its pay offer and hires more staff. Lula helped found the union in the early 1980's.
``We will go to strike if they don't negotiate with us,'' said Jose Domingues, the head of the university professors' union and who participated yesterday in meetings with Mantega, in a telephone interview. He wants the government to hire 400,000 more workers by the end of 2006.
To contact the reporter on this story: Guillermo Parra-Bernal in Brasilia at gparra@bloomberg.net
To contact the editor of this story: Laura Zelenko at lzelenko@bloomberg.net