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# Lula Won. The Markets Want a Third Round
- URL: https://www.opendemocracy.net/lula-won-the-markets-want-a-third-round/
- Published: 2026-11-06T12:29:29.000Z
- Updated: 2026-11-06T12:29:29.000Z
- Description: Brazil’s voters rejected austerity, and its candidate fled to Florida. The markets that backed him stayed, and Lula’s finance minister has begun to give them what the ballot box refused. In Britain, the script is familiar.
- Author: Pedro Paulo Zahluth Bastos
- Tags: Lula da Silva, Lula, brazil, Brazil election, Denis Healy, Margaret Thatcher, markets, Budget 2026

On Sunday, October 25, Luiz Inácio Lula da Silva won Brazil’s presidential runoff with [51.8 percent of the vote](https://resultados.tse.jus.br/?ref=opendemocracy.net). His rival, Flávio Bolsonaro, is the son of former president Jair Bolsonaro, [sentenced to twenty-seven years in prison](https://www.scrippsnews.com/us-news/us-to-issue-flavio-bolsonaro-and-family-visas-after-he-defied-a-travel-ban-and-left-brazil?ref=opendemocracy.net) for plotting a coup. The next day, the financial markets punished no government policy. They punished the vote. The Ibovespa, the São Paulo stock index, [fell 13.9 percent](https://www.riotimesonline.com/brazil-stocks-close-down-13-9-percent-lula-win-2026/?ref=opendemocracy.net) after the first automatic halt in trading since March 2020, and the real lost more than 8 percent against the dollar. Wall Street rose that day. The shock was Brazilian, and its cause is no mystery.

Three weeks earlier, when Flávio led the first round, the same index had [jumped 7.7 percent to a record](https://en.mercopress.com/2026/10/26/brazil-s-real-plunges-more-than-8-and-s-o-paulo-stocks-slump-after-lula-s-victory?ref=opendemocracy.net). The bet had a name and a program, and it lost at the polls. Since then the dollar has eased, but stocks kept falling: [16.6 percent in three sessions](https://www.campograndenews.com.br/economia/dolar-a-vista-volta-a-recuar-e-encerra-pregao-cotado-a-r-5-34?ref=opendemocracy.net). The panic of a few days now threatens to set fiscal policy for four years.

## The third round

The markets are not alone. On election night, Flávio refused to concede and vowed to seek the annulment of the runoff. His pretext was a two-hour extension of voting that his own campaign had requested for seventeen municipalities. Only [35,521 votes](https://www.opovo.com.br/noticias/politica/eleicoes/2026/10/26/no-2-turno-apenas-35-mil-votos-foram-registrados-apos-17h.html?ref=opendemocracy.net) were cast after 5 p.m., less than 0.03 percent of the total. On Monday, his right-wing Liberal Party (PL) [recognized the result](https://www.aljazeera.com/news/2026/10/27/bolsonaros-party-accepts-result-after-trump-suggests-vote-was?ref=opendemocracy.net). Donald Trump, who in 2025 [imposed a 50 percent tariff on Brazilian goods](https://www.occrp.org/en/news/trump-threatens-50-tariffs-on-brazil-over-bolsonaro-trial?ref=opendemocracy.net) over what he called a “witch hunt” against Jair Bolsonaro, said “it looked like another rigged election.”

Then Flávio fled. On the Monday after the election, Supreme Court Justice Alexandre de Moraes had ordered him to surrender his passports within twenty-four hours, [citing the risk that he would leave the country](https://www.gazetadopovo.com.br/republica/pf-confirma-flavio-bolsonaro-deixou-brasil/?ref=opendemocracy.net). Flávio is under investigation for corruption and money laundering, including over the funding of a biopic of his father. In a video, he said he had [“never thought of leaving.”](https://www.infomoney.com.br/politica/flavio-bolsonaro-viaja-para-os-eua-apos-derrota-na-eleicao-diz-agencia/?ref=opendemocracy.net) On Tuesday the deadline passed, the Federal Police canceled his passports, and he [left for the United States](https://www.scrippsnews.com/us-news/us-to-issue-flavio-bolsonaro-and-family-visas-after-he-defied-a-travel-ban-and-left-brazil?ref=opendemocracy.net) with his wife and daughters, defying the travel ban. A State Department official said Washington would issue the family visas. By Wednesday he was [in Miami](https://www.metropoles.com/mundo/fugido-do-brasil-flavio-bolsonaro-esta-em-situacao-regular-nos-eua?ref=opendemocracy.net) on an Italian passport, and his allies said he would ask his patron for political asylum. His father, too, left for Florida after losing to Lula in 2022.

The fronts converge. Flávio calls the social package of the campaign’s final weeks vote-buying. The markets call the same measures fiscal risk. The losers want to annul the result in the courts. The Faria Lima, the São Paulo avenue that serves as Brazil’s City of London, wants to undo it in the budget. Its spokesmen now ask Lula to carry out the program that lost: the *tesouraço*, Portuguese for a giant pair of scissors, taken to the social chapter of the 1988 Constitution. This is the third round.

## The program that lost

It is worth recalling the losing side’s agenda. Flávio’s economic coordinator, Daniella Marques, [promised to cut R$190 billion](https://www.gazetadopovo.com.br/eleicoes/2026/daniella-marques-diz-que-plano-de-flavio-bolsonaro-preve-corte-de-r-190-bi-em-gastos/?ref=opendemocracy.net) from public spending, about $36 billion or £27 billion, 1.5 percent of GDP. Months earlier, the press had reported [campaign studies](https://www.correiobraziliense.com.br/politica/2026/04/7403233-flavio-avalia-reajuste-de-gastos-sociais-pela-inflacao-e-mais-privatizacoes.html?ref=opendemocracy.net) on limiting increases in pensions and in the constitutional floors for health and education to inflation. The campaign denied it. Voters rejected the program anyway.

It is now coming back through the Finance Ministry. Two days before the vote, Finance Minister Dario Durigan [said](https://www.cnnbrasil.com.br/economia/money/macroeconomia/durigan-diz-que-e-impossivel-resolver-problema-fiscal-por-completo-em-2027/?ref=opendemocracy.net) that no one could “sell the market” a fix in the first year. Two days after it, following the crash, he [promised](https://www.cnnbrasil.com.br/economia/money/macroeconomia/durigan-diz-que-vai-propor-ajustes-fiscais-para-perseguir-centro-da-meta/?ref=opendemocracy.net) to pursue the center of the fiscal target “formally.” His bill would scrap the tolerance band around the 2027 surplus target, which means up to [R$36.6 billion](https://investirecocaresocomecar.com.br/meta-fiscal-2027-centro-durigan/?ref=opendemocracy.net), about $7 billion or £5 billion, of extra tightening. It would also widen his power to freeze spending. It is doubtful that the surplus matters much even to the markets. They stood by Jair Bolsonaro after what he did to the public accounts in his failed bid for reelection in 2022.

## Austericide and betrayal

Brazil has seen this movie twice before. The first time was recent. Between mid-2024 and mid-2025, the Finance Ministry tightened the budget, and its own [Secretariat for Economic Policy rated the stance contractionary](https://static.poder360.com.br/2025/12/Boletim-RFE-2024-1o-Semestre-de-2025.pdf?ref=opendemocracy.net). Meanwhile the Central Bank [raised its policy rate, the Selic, from 10.5 to 15 percent](https://www.bcb.gov.br/controleinflacao/historicotaxasjuros?ref=opendemocracy.net). In Datafolha polls, the share of voters rating the government good or excellent [fell from 36 to 24 percent](https://www.intercept.com.br/2026/10/02/governo-extrema-direita-acelera-colapso-democracia/?ref=opendemocracy.net). The electoral turnaround came only when the government loosened its grip in the final stretch of the campaign.

The second time was 2015\. Dilma Rousseff won reelection promising to protect jobs and wages, then handed the Finance Ministry to a banker with her opponent’s program. The economy shrank by more than 3 percent in 2015 and again in 2016, revenue fell with it, and the deficit grew. Rousseff lost the voters who had elected her and was left at the mercy of a Congress that removed her on the pretext of budget maneuvers. An electoral betrayal does not calm the markets. It opens the way to a coup.

None of this was forced by necessity. Under Fernando Haddad, the Finance Ministry governed as if the balance of forces that toppled Rousseff were a law of nature. Brazil borrows overwhelmingly in its own currency and holds large foreign-exchange reserves, yet it runs [one of the highest real interest rates in the world](https://www.infomoney.com.br/economia/com-selic-em-1345-brasil-tem-maior-juro-real-do-mundo-set2026/?ref=opendemocracy.net). Compared with what international finance demands of emerging markets with far thinner buffers, Brazil’s macroeconomic policy has been more royalist than the neoliberal king. What is contained by decision can be released by struggle. The campaign to end the six-day working week proved it. A movement born on social media pushed a [constitutional amendment](https://en.mercopress.com/2026/10/15/brazil-approves-a-40-hour-week-and-two-days-off-ten-days-before-the-runoff?ref=opendemocracy.net) through Congress ten days before the runoff, against the employers’ lobby.

The fiscal framework will be revised anyway. The Treasury’s own [projections](https://static.poder360.com.br/uploads/2026/07/RPF-jun26-1.pdf?ref=opendemocracy.net) show its targets cannot be met from 2028, even with the largest spending freeze the law allows. The question is who pays. It could be pensioners, through the end of the link between benefits and the minimum wage. It could be health and education, through their constitutional floors, or the poor, through another freeze of the Bolsa Família cash transfer, or public investment. Any of these would look like a betrayal to the voters who fought to reelect Lula. The presidency could then pass in 2030 to a right-winger more palatable than the Bolsonaros, such as São Paulo’s governor, Tarcísio de Freitas, [reelected in the first round](https://www.correiodamanha.com.br/nacional/sao-paulo/estado-de-sao-paulo/2026/10/324290-tarcisio-e-reeleito-governador-de-sp-com-6265-dos-votos-no-1-turno.html?ref=opendemocracy.net) with 62.7 percent.

## Britain’s Healey moments

British readers know this script. In 1976, with sterling falling, a Labour chancellor, Denis Healey, [turned back at the airport and went to the IMF](https://www.chathamhouse.org/publications/the-world-today/2016-12/britains-big-bailout-december-15-1976?ref=opendemocracy.net). The $3.9 billion loan came with significant spending cuts, and three years later Margaret Thatcher was in Downing Street. Last week, another Labour chancellor named Healey delivered what one fund manager called [“the boring Budget that bond markets demanded.”](https://www.trustnet.com/news/13487487/credible-uneventful-boring-how-the-experts-reacted-to-healeys-first-budget?ref=opendemocracy.net) A year ago, Andy Burnham said Britain had to get beyond being [“in hock to the bond markets.”](https://www.ajbell.co.uk/news/articles/uk-chancellor-takes-aim-burnhams-hock-bond-markets-comment?ref=opendemocracy.net) Before taking office, he said he had [“never said you can just ignore the bond markets.”](https://www.inkl.com/news/andy-burnham-s-change-in-tack-on-fiscal-rules-and-bond-markets-is-understandable?ref=opendemocracy.net) John Healey kept the fiscal rules, a [£15 billion buffer](https://live.euronext.com/en/financial-news/british-markets-take-healeys-first-budget-their-stride?ref=opendemocracy.net) and the promise of [“no tax rises on wages or dividends.”](https://www.lbc.co.uk/article/what-in-budget-2026-john-healey-5HjdkZM%5F2/?ref=opendemocracy.net) He doubled the surcharge on bank profits, and the gilt market took it in its stride.

The comparison has limits. Britain’s gilt market has already brought down a prime minister, in 2022, while Brazil’s problem is the price of its debt more than its size. But the question is the same on both sides of the Atlantic: whether a government elected to change course answers first to its voters or to the bond market.

## A Congress worse than 2015

The Congress that takes office on February 1 may be even more hostile than the one that removed Rousseff. Bolsanaro’s rightwing PL will have [the largest bloc in the lower house](https://www.gazetasp.com.br/politica/camara-tera-121-deputados-do-pl-e-70-do-pt-confira-como-ficaram-as-513-cadeiras-por-partido-e-os-mais-votados-das-eleicoes-de-2026-no-brasil/?ref=opendemocracy.net), 121 of 513 seats, against 70 for Lula’s Workers’ Party (PT). In the Senate, the right will hold [49 of 81 seats](https://www12.senado.leg.br/noticias/materias/2026/10/25/fim-da-eleicao-define-composicao-do-senado-em-2027-com-13-partidos?ref=opendemocracy.net), exactly the three fifths needed to amend the Constitution. The PL [wants Rogério Marinho](https://www.congressoemfoco.com.br/noticia/122994/valdemar-diz-que-pl-quer-eleger-rogerio-marinho-presidente-do-senado?ref=opendemocracy.net), the rapporteur of the 2017 labor reform, to preside over the Senate, and it [claims 49 of the 54 votes](https://www.cnnbrasil.com.br/blogs/caio-junqueira/politica/pl-rejeita-acordao-e-defende-impeachment-de-moraes-e-dino/?ref=opendemocracy.net) needed to impeach Justice Moraes. Before this Congress, a government that abandons its voters loses both its social and its parliamentary base.

## What to do now

The markets want short-term signals, and some make sense. Lula should name his economic team soon, because uncertainty over who will run the Finance Ministry weighs on prices. But a name is worth its program. A minister who announces more austerity will calm the Faria Lima for a week and repeat the mistake of 2024.

On Monday, the Treasury [bought back R$14.8 billion in bonds](https://exame.com/invest/mercados/por-que-o-tesouro-esta-comprando-de-volta-os-proprios-titulos-apos-a-eleicao/?ref=opendemocracy.net), about $2.8 billion or £2.1 billion, to steady the debt market. On Tuesday, the governor of the Central Bank, Gabriel Galípolo, [said it could intervene in the currency market](https://ac24horas.com/2026/10/27/dolar-cai-quase-1-e-ibovespa-recua-apos-tombo-eleitoral/?ref=opendemocracy.net) if it saw dysfunction. Those are the right tools. The Central Bank should not answer panic with higher rates. With the Selic at [13.75 percent](https://www.bcb.gov.br/controleinflacao/historicotaxasjuros?ref=opendemocracy.net), raising it on November 4 would make the public debt dearer and squeeze families who spend [28.7 percent of their income](https://www.bcb.gov.br/estatisticas/estatisticasmonetariascredito?ref=opendemocracy.net) servicing debt. Public banks can do the rest. Before the first round, Banco do Brasil [cut its rate on personal loans from 7.43 to 5.86 percent a month](https://gazetabrasil.com.br/economia/2026/10/14/juros-do-emprestimo-pessoal-caem-para-855-ao-mes-aponta-procon-sp/?ref=opendemocracy.net), still close to 100 percent a year.

There is another lever. The 3 percent inflation target is set by the National Monetary Council, where the government holds two of three votes. A 2024 decree signed by Lula requires [thirty-six months’ notice](https://www2.camara.leg.br/legin/fed/decret/2024/decreto-12079-26-junho-2024-795845-publicacaooriginal-172205-pe.html?ref=opendemocracy.net) to change it. Another decree can lift that lock. A less austere target would lower the interest rate needed to meet it.

## A new Transition Amendment

The medium-term signal matters more, and the question is who writes the revision of the fiscal rules: this Congress, before it rises on December 22, or the next one, from February. In December 2022, before Lula took office, an outgoing Congress passed a [Transition Amendment](https://www.migalhas.com.br/quentes/379051/pec-da-transicao-e-promulgada-pelo-congresso?ref=opendemocracy.net) to the Constitution in a few weeks. It opened R$145 billion above the 2023 spending cap, about $27 billion or £20 billion at today’s rates, to pay for the Bolsa Família. Lula needs a new one. Public investment and capital injections into state companies and the BNDES development bank should leave the spending limit. Real increases in the minimum wage and in the Bolsa Família should be guaranteed. And spending should no longer be tied to revenue. Once in the Constitution, these rules could be undone only by three fifths of both houses, voting twice.

The same fiscal target can be met by defending the interests of the majority, through tax justice, or those of the minority, by cutting social spending. A government elected by a popular uprising against the Bolsonarist threat cannot choose the path favored by the richest Bolsonaristas. Income tax changes published by December 31 apply from January. A [2025 law](https://www.courthousenews.com/brazil-enacts-tax-reform-with-new-exemptions-minimum-rate-for-top-earners/?ref=opendemocracy.net) already exempted earnings up to R$5,000 a month, about $940 or £700, and set a minimum tax of up to 10 percent on incomes above R$600,000 a year, about $112,000 or £85,000\. What remains lightly taxed is well known: part of dividends, exempt in Brazil from 1996 until this year; the “interest on equity” that companies deduct as a cost; and tax-exempt investments concentrated at the top.

Brazil does not have a debt crisis. It has a crisis of the cost of debt. In the twelve months to August, interest [cost R$1.18 trillion](https://agenciabrasil.ebc.com.br/economia/noticia/2026-09/contas-publicas-tem-deficit-de-r-10-bilhoes-em-agosto?ref=opendemocracy.net), about $221 billion or £166 billion, 8.9 percent of GDP. The primary deficit was 0.6 percent. Flávio has gone to Florida. The markets that bet on him lost, and the bill for that bet should not be paid with the promises that reelected Lula. The ballot box has spoken. The markets cannot play a third round.

*Pedro Paulo Zahluth Bastos is a full professor at the Institute of Economics of the University of Campinas (Unicamp), Brazil.*