Forgoing the distance: covid-19 spreads in Brazil

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Hello and welcome to the intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide fresh perspective on the events shaping your world. The private equity industry has plenty of detractors who see the funds as draining the lifeblood of businesses and replacing it with debt. As more fragile firms go bust, we look into private equity and ask how well it can weather the pandemic and the case of the missing mummies. Our correspondent got wind of a controversy about some pretty old corpses. When he went to investigate, he found a bigger debate about what's good for tourism and what's good for cultural heritage. But first, Yesterday Brazil had another record day of COVID 19 deaths. More than 1200 people died. The country has the second highest number of cases in the world behind only America. But Brazil's president, Jair Bolsonaro has downplayed the pandemic, railed against lockdowns and flouted social distancing guidelines. What's more, at a moment when the death toll is rising sharply, the country is starting to open up.

The situation here in Brazil is incredibly worrying. Mass graves are being dug in parts of the country. The intensive care units are filling up. Brazil has more than half a million confirmed cases, but we really don't know the extent of it. A recent study concluded that the caseload could be Seven times the official number.

Sarah Maslin is our Brazil correspondent based in Sao Paulo.

But the most striking thing for me is the real resistance Brazilians have shown to adhering to social distancing from the very beginning. Part of that's because of poverty, which makes it really hard for people to stay home. But it's also partly because of the mixed messaging that's been going on on the top levels of their government.

And so you would say it's clear that the messaging, in particular from Jair Bolsonaro, is adding to the misery.

That's right. So from the very beginning, the president, Jair Bolsonaro, has scoffed at the medical establishment and all of its advice. He's quarreled with and lost two health ministers since this crisis began and continued to encourage people to defy the lockdowns that have been implemented by state and local governments. His attitude to COVID 19 really resembles that of President Trump. He's been touting hydroxychloroquine, this malaria drug that seems to not only useless, but also potentially dangerous for patients of COVID 19.

It sounds as if there are a lot of parallels between what's going on in Brazil and what's going on in America.

Indeed, a lot of friends from back home in America are looking at Brazil and saying, hey, it looks like you guys are going through exactly what we're going through here. But I often tell them there's one important difference, which is that Brazil has a universal healthcare system, actually modeled after the NHS in Britain, that connects municipalities, states, and the federal government. It's an imperfect system, but that kind of coordination meant that it managed to respond quite well to Zika and H1N1 in the past. It's hard not to think that the universal system really could have mitigated this pandemic by doing a vast public health campaign and testing and tracing people throughout the country. Instead, though, after the departure of the first health minister, meetings sort of slowed and stopped between the National Health Secretary and the authorities and the states and the municipalities. And it's proved really hard both to get resources from the federal government to the states that need them, and also to provide a message about what people should be doing and why.

Well, exactly. As the sort of face of the government, presumably what Mr. Bolsonaro has been doing has confused Brazilians.

That's right. So here in Sao Paulo, the biggest city, when I hear noise outside my window, there are sort of two things. It could be people banging pots and pans to protest Bolsonaro or his fans driving around blasting their car horns, trying to get the governor to open things up. So that ends up being really confusing for people. And you see it in the numbers. Just about half of people here are really adhering to the lockdown rules. And to stop the virus's spread, the state's government says that at least 70% of people staying at home is needed. I spent last week in some of the poor neighborhoods in the south of the city that are really struggling to adhere to lockdowns. And a lot of businesses have kept their stores open, even though they're not supposed to. The owner of one clothing store told me that he thinks the lockdown is useless. And that he believes the number of deaths reported by the state is actually faked to try to make the president look bad. He's not alone. I met others with similar skepticism about the virus. A guy playing pool in a bar who said that he thinks that beer can kill the virus particles. This is stuff that he's seen on WhatsApp. And what it really shows is the lack of a decent public health campaign.

But you also mentioned that there is a certain economic element to this that people can't lock down because the home situation just precludes it.

Yes, that's true. That's also part of the situation of the guy in the bar. And a lot of people in poor neighborhoods who have jobs without contracts or benefits, which makes social distancing really hard. A monthly benefit of about $110, introduced back in April, has helped a lot of informal workers, but it also means that there are long queues of people trying to obtain it from the banks.

So some people are clearly struggling to stick to the lockdowns. But you also hinted at conflict between the federal and state governments over these kinds of measures. How's that playing out?

So at the beginning of the pandemic, it was Bolsonaro on top saying people needed to get back to work, and the governor saying, no, everyone should stay home for public health reasons. Bolsonaro actually mounted a legal challenge trying to pull down the quarantine orders, but the Supreme Court rejected it back in April. But now governors are starting to yield to pressure from the business community and from people who want to get back to work. Joao Doria, the governor of Sao Paulo, recently announced plans to start opening up the state in New York, even though hospitals are still dealing with an increase in patients. And at the city's Saul Cemetery, 3,000 fresh graves have been dug for COVID 19 victims. I visited there last week and spoke to a grave digger. He told me that the cemetery's old average of 11 or 12 burials a day has jumped to more than 40 and just keeps growing. He also said that unfortunately a lot of people he meets don't seem to believe in the danger until they lose a family member.

And so what about the hospitals? If they're still under stress and these lockdowns are indeed lifted, isn't there still a great risk that they would become overwhelmed?

I interviewed a hospital director in the south of the city who said the real problem is because there hasn't been a really effective mass testing and tracing program in Brazil. They're working in the dark. They don't know if they're at the peak, past the peak, or still far from it. Here in Sao Paulo, they haven't yet had to turn people away, but they're pretty much at the limit. Other places in the country like Manaus and the Amazon have already seen their hospital system collapse. And, and what I'm most worried about are the poorer states and the interior of the country where the virus is now spreading the quickest. These are places that have pretty rudimentary hospital infrastructures. And at a moment where states are starting to open up, the hospitals are just hanging on.

Sarah, thanks very much for joining us.

Thank you, Jason.

To follow all of the Economist coverage of the COVID 19 pandemic and how it's swiftly reshaping the world, visit economist.com Coronavirus. As the economic fallout from the pandemic grinds on, familiar names have started to declare bankruptcy.

The Hertz rental car company filed for bankruptcy protection late Friday in the first major financial casualty to rock the hard hit travel and tourism industry. J. Crew filed for bankruptcy Monday.

U.S. luxury department store chain Neiman Marcus.

Group filed for bankruptcy protection on Thursday. They all had something in common, big debts partially as a result of buyouts by private equity funds.

The century old rental company, saddled with.

Nearly $19 billion in debt, was unable to reach a deal with creditors.

It reached a deal to convert $1.65.

Billion of its debt into equity. The Dallas based retailer plans to cede.

Control to creditors in exchange for eliminating.

$4 billion of debt.

Critics have long argued that the private equity industry saddles companies with debt that's only payable in the good times. The current crisis raises fresh questions about the industry's business model, but it also offers fresh opportunities.

So these investors will take capital and then they will buy up firms and help rejig their business models in a way that private equity hopes will earn them a very nice return.

Alice Fulwood is the Economist's U.S. finance correspondent.

But in doing this, they tend to leverage these companies up a lot, and that can make firms a lot more fragile. And one of the criticisms levelled at private equity is that this fragility sort of ultimately is the undoing of a lot of companies that they've invested in, like J. Crew, Hertz or Neiman Marcus. On the other hand, you would expect to see bankruptcies from formerly private equity owned or currently private equity owned firms, because they have owned and do owned an enormous slice of corporate America.

How much then of corporate America?

So private business is worth around $5 trillion, and they own the majority of private firms in America that account for around 5% of GDP and employ a similar share of America's workforce. And they've really grown very significantly over the past five to 10 years. In particular, more and more cash has flowed to private equity managers since the global financial crisis.

Why? How did they do during the financial crisis?

During the global financial crisis, a lot of places that investors had put their money, either hedge funds or mutual funds, because there was so much volatility, they suffered very heavy losses during the crisis, and private equity seemed to do a little better. And they also managed to make sort of quite opportunistic acquisitions. So in the post crisis years, the Funds raised in 2009 by private equity had some of the best returns that the industry has ever seen. Those, those funds returned on average about sort of 18%.

And so where do they sit now? If the global economy is under great threat, does that leave private equity at greater risk or lesser?

So in the first quarter of 2020, we did get some reporting from the sort of biggest private equity firms, which themselves are listed companies. And they did report paper losses on their portfolio, $90 billion. That is just 7% of their assets under management. Given the flexibility they have, though, that could sort of reflect that they haven't been as aggressive at marking down the value of their companies as investors in public markets have been in reevaluating what they think of firms worth. So it doesn't look as though there have been some initial losses, although they don't necessarily look that bad. The problem is increasingly private equity deals have been done with a lot more leverage, in particular over the past three years. So it does seem logically that private equity firms would be in more trouble because of the way that they're structured to have lots of debt.

So these firms have started relying on a lot more debt, more leverage, as you say. How bad does that look for them?

Right now, there were 18 firms that are called junk rated. That means that the ratings agencies think that they are very high risk. And 18 of these firms defaulted on their debts in the first quarter of this year. And half of those were owned by private equity. So it does seem as though they are more fragile. There are ways in which that leverage is sort of constricting them from getting access to other sources of capital that you might want in this crisis. So, for example, the government lending programs will not lend to firms that are leveraged as highly as most private equity firms are. The government is also just not a fan in general. They've sort of banned them from accessing the Small Business Administration programme, the paycheck protection programme, which was designed to sort of help small companies keep stuff on their payrolls. And that's just because they've classed them as speculators and they don't want to be sort of helping firms that are owned by private equity.

So in the end it sounds like firms owned by private equity are in.

A worse position then it's not necessarily the worst case for firms to be owned by private equity. So they have these sort of sophisticated professional managers who can help them get access to lots of sources of capital during this difficult time. If no one's willing to lend to the company, then what you're seeing is a lot of private equity firms are saying that they're stumping up additional cash themselves in what's called an equity cure. They can put more cash in by buying more equity and that will help keep the firm afloat during this time. And so it's not necessarily the case that the riskiest owners of a business are private equity owners.

Well, much of the story so far has been how private equity works and is doing in America. What about more widely say in Europe?

In Europe, private equity is not as dominant an industry, it's not as large. It doesn't have this sort of huge systemic hold over the sort of private slice of corporate life. But it has grown significantly in recent years. They have managed to shake off this label of being these sort of predatory asset stripping locusts, as one senior politician in Germany once called them. And private equity firms in general are happy to sort of step up and infuse more capital into their portfolio companies to sort of help them weather this difficult time. But there is more variation because some countries in Europe have not been as badly affected by the pandemic as they have in America. So that brings with it a less difficult crisis, but also potentially sort of similarly fewer opportunities for European firms to pounce on.

So after the last financial crisis, private equity came out stronger. It's grown, it's expanded, it seems to have shaken off some of its dark image. Do you think it's set to grow more, to become even more attractive Now?

There are two dynamics at play here, and one is that they have this existing portfolio of companies that they need to sort of tide over and keep afloat during this difficult time. That may require putting up extra cash. But if there is this sort of wave of large bankruptcies of brand name firms that go bust and they make sort of very large losses, then that will sort of hurt them both reputationally and also the returns that they, they have for their investors. The hope of private equity is that they can more than balance that or offset that using this sort of huge mountain of dry powder, which is what private equity calls the sort of cash they have in reserve to buy new firms. That's amount that's sort of piled up to $1.6 trillion now. And you are already seeing sort of the biggest brand name private equity firms like Apollo, they are sort of pouncing on opportunities. So they bought a stake in Expedia, a travel company, which obviously is one of the industry's worst hits by this crisis. So if that opportunistic investing can generate high enough returns and they can keep few enough of their existing firms from going bankrupt, then it's very possible that this crisis will help burnish both their reputation and their returns.

Alice, thank you very much for joining us.

Thank you, Jason.

They've haunted us in horror movies for almost a century. He's going to kill her and make her a living mummy like himself.

A mummy in an undiscovered tomb. The mummy, the living dead bringing terror.

And death across 4,000 years.

One place you might not expect to find mummies is Mexico. But in a picturesque valley in the center of the country is Guanajuato, home to Mexico's only mummy museum. Over the years, the artifacts have become local celebrities, even starring in a 1972 film, Las Mummias de Guarajuato. Recently, a pretty basic question has been at the center of a spat in the city. How many mummies are there? Unwrap that mystery and beneath lies a bigger discussion as curious as how they got there in the first place.

Not only is there a large collection of mummies, but the process by which these mummies came to be was completely accidental.

Richard Enzer is our Mexico correspondent.

Unlike Egypt, they're comparatively uncelebrated and their story is comparatively untold. Back in the day you had to pay a burial tax every five years, or your family had to pay one to keep your body in the grave that you were allotted. And if not, they take you out. And so when they were disinterring all of these corpses, they were shocked to discover that they had accidentally perfected the art of mummification in central Mexico in the 1800s. And of course, it was only a short step to turn it into a museum at the very same pantheon where these mummies are created. You can now visit and look at the 117 mummies that have been kept there.

But that number 117 was somewhat in dispute.

Well, exactly. There was a complaint from the previous manager of the Mexican Mummy Museum, who is not very enamored with the current administration of the museum, complaining that an inventory she had requested of all the mummies failed to mention 22 of these specimens. And she was outraged. And she went to the press, reported it to the state's auditor, saying that there was a case of missing mummies.

And so you had to do a little detective work to see if she had reason to worry.

Well, if there's an argument about how many mummies are missing, the only way to fix that is to count them. And that's exactly what we did. We went there and we counted them, and we are very delighted to report that there were precisely 117 mummies in the collection, none of them missing, but precisely 22 mummies out the back in storage in the conservation area. And this was where the confusion had come from. The inventory did not mention that these mummies were out the back.

So, okay, not the mummification mystery that perhaps you thought you were getting into. What's the fuss really about then?

Yeah, so we were obviously delighted that all the mummies were where they should be. But what we realized is there is a slow burning controversy and a debate about what to do with these mummies in Guanajuato. That's actually really interesting. So this museum at the moment, it gets 600,000 odd people every year, which is triple the local population. It is very unusual for a museum in a place like Mexico where it actually provides 6% of the municipal budget, only property tax gives more to the local municipality. So it's an incredible source of income as well as an important cultural artefact.

Right. So presumably this is a question over how far the monetization of mummies should go.

Exactly. Last year there was a controversy when they put some of the mummies in a kind of Halloween style fun fair. Very removed from the sensitive and scientifically inquiring context of a museum and much more of an entertainment context. And then there's this big question about a new museum. The mayor wants to spend 200 million pesos, which is just under $10 million, to build a new, larger museum, which can, of course, rake in more money. It will give them facilities to look after the mummies better than they currently can. But it will also be put in some kind of commercial center rather than in a cemetery, which is very good for business and good for the economy. And some of the more traditional people, they say this is not the right way to look after the mummies. There are people living in this town who are descendants and relatives of these very corpses. So there's a very interesting debate about the meaning of these items and how a society and a city should look at them.

Richard, thank you very much for joining us.

Jason, thank you.

That's all for this episode of the Entire Intelligence. If you like us, give us a rating on Apple podcasts and you can subscribe to the economist@exterator.com radio. Offer 12 issues for $12 or 12 pounds. See you back here tomorrow.