World Stock Watch

Brazil’s Financial Markets in Free Fall as Investors Lose Faith

Currency Crisis Spreads to Stocks and Bonds

Brazil’s financial markets are in chaos as investors increasingly doubt the government’s ability to tackle a deepening fiscal crisis. The real has plummeted to a record low, and the selloff is now engulfing stocks, local-currency debt, and dollar bonds. Traders are even betting against a sovereign default.

Central Bank’s Measures Deemed Insufficient

The central bank’s extraordinary measures to stem the currency’s slide on Tuesday are seen as a temporary fix, and lawmakers’ moves to water down a high-profile austerity package are likely to add to the turmoil. Market watchers warn that President Luiz Inacio Lula da Silva’s government is not serious about reining in a soaring fiscal deficit, which stands at 10% of GDP.

Investors Abandon Brazil

The real has been the worst-performing currency in the world over the past four sessions, adding to a 21% drop this year against the US dollar. The benchmark Ibovespa stock index has fallen 3.8%, while swap rates have jumped and dollar bonds have tumbled. Credit default swaps have widened to their highest level in more than a year.

Government’s Fiscal Policy Under Fire

Brazil’s lower house has altered Lula’s spending proposal, striking a key provision that would have let the government restrict the use of tax credits by companies if finances worsen. A plan to change the military pension system has also been delayed until 2025. Finance Minister Fernando Haddad has blamed the currency’s woes on a “speculative attack,” but investors remain unconvinced.

Investors Demand Action

Strategists are abandoning bullish bets on Brazil’s assets, and investors are demanding concrete action from the government to address the fiscal crisis. “Fiscal is 100% the main problem,” said Gregory Hadjian, a global macro strategist at Loomis Sayles. “A material response on fiscal is the real catalyst to turn things around.”

Economic Growth Masks Deeper Concerns

Despite positive signs on growth, Brazil’s economy is still plagued by concerns over inflation and overheating. The government’s reluctance to implement spending cuts has left the central bank to bear the burden of combating inflation, which has stoked fears of fiscal dominance.

Investors Wait for a Turning Point

For now, few investors are willing to wager when the rout will end, unless the government changes tack. “Momentum is driving everything Brazil-related,” said Hadjian. “Fiscal is the main problem, and a material response on fiscal is the real catalyst to turn things around.”