Brazil’s Real Tumbles to Record Low as Financial Markets Worry About Government Spending
Brazil’s real currency tumbled to a fresh record low on Wednesday, dropping 2.9% to 6.2896 per dollar, its largest daily decline since November 2022. The currency had earlier closed at 6.26, down 2.7%. The decline was driven by concerns over the Brazilian government’s spending plans and wide budget deficit.
The country’s stock market also fell, with the benchmark index closing at a six-month low, down 3.15% in its largest daily percentage drop since November 2022. The cost of insuring exposure to Brazil’s bond debt rose to a 14-month high, as investors grew anxious about the country’s deepening financial market crisis.
The government’s fiscal bill, aimed at putting its finances on a more sustainable footing, has yet to be passed by Congress. Investors are doubtful that lawmakers will be able to pass the bill, which has sparked concerns about the country’s fragile fiscal trajectory and its impact on inflation expectations.
Brazil’s central bank has been intervening in the currency market to support the real, and has held spot U.S. dollar auctions for the third consecutive session. The bank has also reaffirmed its tough monetary policy stance.
The yield on Brazil’s local sovereign bond benchmark rose to 14.77% on Wednesday, its highest level since March 2016. The yield has climbed sharply this year, reflecting concerns about the country’s fiscal situation.
Five-year credit default swaps, which measure the cost of insuring against a sovereign default, stood at 194 basis points, the most expensive since October 2023. The dollar-denominated MSCI Brazil index has fallen more than 30% since the start of the year.
Investors are calling for fiscal consolidation, including spending cuts, to address Brazil’s deepening financial crisis. “At this point the bar is very, very low for a positive fiscal surprise,” said Arif Joshi, co-head of the emerging markets debt platform at Lazard Asset Management. “It always starts with baby steps and it builds from there.”
