A New Chapter in the Fiscal Adjustment Drama

BRAZIL ECONOMICS - Report 21 Sep 2015 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Recognizing the serious error of sending to Congress a budget bill with a primary deficit of 0.5% of GDP, which prompted S&P to downgrade Brazil’s credit rating, the administration sent a package of measures to Congress aiming to achieve a primary surplus of 0.7% of GDP in 2016. It did not obtain any positive reaction: for different reasons, it was strongly criticized both by opposition parties and the PT itself. With the government’s credibility severely eroded by the erratic movements in recent months, Brazil’s CDS quotations rose further, closely followed by additional weakening of the exchange rate (Graph 1), and the yield curve shifted further upward, maintaining its positive slope (Graph 2).

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