Brazil’s financial markets are in turmoil as investors lose faith in the government’s ability to contain a deepening fiscal crisis. The real currency has plummeted to a record low, engulfing stocks, local-currency debt, and dollar bonds. Market watchers say extraordinary measures by the central bank are temporary fixes, and lawmakers’ moves to water down an austerity package will only add to the turmoil.
The country’s annual budget gap is 10%, far wider than in President Luiz Inacio Lula da Silva’s first administration. The government’s reluctance to cut spending has left most of the heavy lifting to the central bank, which recently lifted interest rates and vowed to combat inflation.
Despite its economic growth, Brazil faces concerns that the economy may be overheating, with inflation expectations at their highest level in over a year. Traders now expect interest rates to peak near 16.25%, increasing the government’s interest cost burden and widening the deficit.
The central bank has carried out large-scale interventions to stabilize the market, but investors say fiscal dominance is becoming a concern. “Monetary policy is no longer effective,” said one economist. “Fiscal policy is the main problem.”
Investors are now looking for signs of change from the government. “Momentum is driving everything Brazil-related,” said a strategist. “A material response on fiscal is the real catalyst to turn things around.”
Source: https://finance.yahoo.com/news/brazil-traders-sell-first-ask-222643785.html