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Brazil: Economy standing on a razor edge - BBH

FXStreet (Delhi) – Research Team at BBH, suggest that this could be a decisive week for Brazil as the toxic mix of complicated politics, worsening fundamentals and financial market stress comes to the fore as today, the congress is supposed to vote on whether to uphold or overturn the decision by President Rousseff to veto a sharp increase in spending.

Key Quotes

“If the veto is overturned, it would threaten the government’s already fragile attempt at fiscal consolidation. At this point it’s unclear whether the government will have enough support to uphold the veto, so it’s possible that they will try to delay the vote. Still, the uncertainty over this story will be a decisive variable for Brazilian financial markets, which are at growing risk of becoming disorderly.”

“The Treasury and the central bank are trying to ensure that liquidity remains ample, but it may not be enough, especially the aforementioned veto is overturned. The Treasury announced a bond buyback yesterday.”

“This is welcome news, at least as a sign that the Treasury is ready to step up alongside the central bank to lean against the moves. The selloff in the local market debt curve accelerated in September, with yields on swaps maturing in January 2017 rising to 15.61% from around 14.2% at the start of the month. The growing fiscal concerns have also led to a sharp steepening of the local debt curve, worsening sentiment locally and making the government budget funding even more difficult and expensive.”

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