Political Crisis and Asset Prices
From looking only at the reflections of past crises on asset prices, it was tempting to predict that the current political crisis – which has seriously eroded the governability of President Temer – would trigger much stronger oscillations in asset prices than have occurred. We believe the relatively less intense fluctuations can be credited to two anchors. The first is the quality of the economic team, who know how to react to keep the markets functioning smoothly. The second is the expectation that the transition to a new president will be quick and serene, with Temer’s replacement, regardless of the name, maintaining the agenda for reforms and having the political capacity to move the process forward.
It is worthwhile recalling what happened when it became clear that President Rousseff did not have the capacity to win approval of the modest fiscal adjustment agenda proposed by Finance Minister Levy in 2015. At that moment, the sovereign risk (the quotations of Brazil’s CDS) rose steeply and the exchange rate depreciated substantially, with future interest rates also climbing steeply. The shaded areas in Graphs 1 and 2 correspond to the period when the measures proposed by Levy were under bombardment by the PT, causing the country to lose its investment grade rating. In the first half of 2015, the real was in the neighborhood of R$ 3.20/US$ and the 10-year CDS quotations were around 300 basis points, with future interest rates fluctuating around 12.5%. From the first half of 2015 onward, however, the CDS quotations shot upward until reaching 600 points, the future interest rates climbed to 17%, and the exchange rate surpassed R$ 4.00/US$.
Now read on...
Register to sample a report