Brazil markets tumble on Lula's first full day in office

By Anthony Boadle

BRASILIA (Reuters) -Brazilian markets delivered a withering verdict on leftist President Luiz Inacio Lula da Silva's first full day in office on Monday, after he pledged to prioritize social issues and ordered a budget-busting extension to a fuel tax exemption.

Lula's decision to extend the fuel tax exemption, which will deprive the Treasury of 52.9 billion reais ($9.9 billion) a year in fiscal income, was a stinging rebuke of his finance minister Fernando Haddad, a Workers Party (PT) loyalist who had said it would not be extended.

Haddad, who is seeking to dispel market fears that he might not maintain fiscal discipline, took office on Monday, pledging to control spending. "We are not here for adventures," he said.

Markets seemed unconvinced.

The real currency lost 1.5% in value against the dollar in afternoon trading, while the benchmark Sao Paulo stock market index fell 3.24%. Shares of state-run oil company Petrobras retreated nearly 6%.

In speeches delivered at his inauguration in Brasilia on Sunday, Lula promised that tackling hunger and poverty would be "the hallmark" of his third presidency after two previous stints running the country from 2003 to 2010.

Financial analysts said the start of Lula's third presidency was in line with his campaign promises, and looked similar to earlier Workers Party policies that led to a deep recession.

Lula narrowly defeated far-right former President Jair Bolsonaro in October, swinging South America's largest nation back on a left-wing track.

On Monday, Lula instructed ministers to revoke steps to privatize state companies taken by the previous administration, including studies to sell oil company Petrobras, the Post Office and state broadcasting company EBC.

On Sunday, he signed a decree extending an exemption for fuels from federal taxes, a measure passed by his predecessor aimed at lowering their cost in the run-up to the election, but that will deprive the Treasury of 52.9 billion reais ($9.9 billion) a year in fiscal income.

The federal tax exemption for fuels will last one year for diesel and biodiesel and two months for gasoline and ethanol, a decree published in the official gazette showed on Monday.

Gabriel Araujo Gracia, analyst at Guide Investimentos, said Lula's plans to increase social spending, expand the role of state banks and abolish a constitutionally mandated spending ceiling harked back to the worst days of PT rule.

"The policies remind us of Dilma Rousseff's government rather than Lula's," Gracia said, referring to Lula's hand-picked successor who was impeached while in office. "Her policies led to Brazil's worst recession since 1929."

Lula, who lifted millions of Brazilians from poverty during his first two terms, criticized Bolsonaro for allowing hunger to return to Brazil, and wept during his speech to supporters on Sunday as he described how poverty had increased again.

Allies said Lula's new-found social conscience was the result of his 580 days in prison, Reuters reported on Sunday.

Lula kicks off his third presidential term after persuading Congress to pass a 1-year 170 billion-reais increased social spending package, in line with his campaign promises.

"The package ended up being bigger than expected, with potential repercussions for public debt sustainability," Banco BTG Pactual said in a research note.

Lula spent his first day in office meeting with more than a dozen heads of state who attended his inauguration.

The meetings started with the King of Spain, and continued with South American presidents, among them the leftist leaders of Argentina, Chile and Bolivia, as well as representatives from Cuba and Venezuela, and Vice President Wang Qishan of China.

($1 = 5.3458 reais)