A 'Responsible' Start.(Luiz Inacio Lula da Silva )

When Luiz Inacio Lula da Silva was sworn in as Brazil's 30th president Jan. 1, many people held their breath. This bearded union man was not just Wall Street's worst nightmare. There were fears that his administration would ruin South America's biggest economy, and take the rest of the region down with it. Instead Brazilian currency and bonds have rallied, and the prophets of imminent debt default have gone quiet. Even the long drought of international credit may be easing. Now, three weeks into office, Lula seems more like the Latin millennium bug, a political tragedy that didn't happen.

It's not that the president has changed, so much as sentiment about him has. He's begun his term much the same way he ended his campaign, preaching parsimony and political compromise. But his repeated pledges to honor Brazilian debts, fight inflation and plump up the budget surplus, if necessary, finally seem to have made a mark. "You sound like a Republican," exclaimed George W. Bush when Lula called on him last month. There are reasonable doubts whether Lula can make good on his hugely ambitious campaign agenda--paying off the "social debt" to the poor, reforming the spendthrift Constitution, resuscitating industry--and still keep creditors happy. But hardly anyone is asking anymore when he will tear off his tie, bare a Che Guevara tattoo and raise the capitalist-bashing banner of his lefty past. "Lula is off to a responsible start," says Mailson da Nobrega, a financial consultant and former Brazilian finance minister. "He's pledged not to overspend and let the Central Bank work independently. Even when he's working the crowds, he's careful to say he's not a messiah."

No one has worked harder at cementing this impression than Lula himself. When he finally got around to picking his cabinet, the sighs of relief could be heard in boardrooms around the world. Most of the 33 ministerial --jobs were awarded to Workers Party (PT) companheiros, but the key jobs went to ringers with made-for-market credentials. Central Bank president Henrique Meirelles, formerly head of global operations for Fleet Boston, is on a first-name basis with global CEOs and has promised a "no adventures" monetary policy. And who would guess that the new finance minister, Antonio Palocci, was once a ranking member of Liberty and Struggle, a Trotskyite cabal? One by one, debt-strapped state governors have marched up to his door to plead for bailouts. But like Pedro Malan, his miserly predecessor, Palocci has learned to respond with the most important word in national finance: "No."

That's an austerity message that investors appreciate. Last week the Institute of International Finance predicted Brazil will receive $14 billion in private capital flows this year, double last year's tally and fully 40 percent of the estimated total for all Latin America. Says Roberto Teixeira da Costa, vice president of Banco Sul America, a So Paulo investment bank: "For now, Lula gets the benefit of the doubt."

He'll need it to improve the Brazilian economy. Last year it grew by a lackluster 1.6 percent; over the past eight years, economic growth averaged only 2.4 percent. Per capita income has not risen in a decade. Inflation has eased slightly in recent weeks, but still hovers at close to 10 percent, the worst mark since 1995. And while a handful of banks and Brazilian blue-chip corporations--oil company Petrobras; Companhia Vale do Rio Doce, a mining combine--have lately raised dollars abroad, a few bond issues do not constitute a rally. Promises of fiscal prudence are fine but make for thin collateral in a bearish world economy. In other words, there isn't much room for error.

So the administration's missteps are a worry. Hardly a day passes without a faux pas from one high-profile aide or another. Lula himself mucked things ...