IMF Therapy for Brazil

MONTEVIDEO – Brazil’s economy is in intensive care. And its intensifying political crisis – impeachment proceedings have now been initiated against President Dilma Rousseff for allegedly using irregular accounting maneuvers to disguise the size of the budget deficit – is raising serious questions about who can provide the much-needed treatment.

The situation is certainly serious. Output is contracting; fiscal revenues are faltering; and the budget deficit exceeds 9% of GDP. Inflation has surpassed the double-digit mark, forcing the central bank to raise interest rates – an approach that is unsustainable, given the deepening recession and the ballooning cost of servicing Brazil’s rapidly growing debt.

Indeed, with Brazil’s creditworthiness deteriorating fast, interest-rate spreads on its sovereign debt are reaching Argentine levels. And its international reserve position of $370 billion, which once seemed unassailable, looks increasingly vulnerable. When the notional value of foreign-exchange swaps ($115 billion) is netted out, the share of short-term public debt (foreign and domestic) covered by international reserves is below the critical threshold of 100%.

At the beginning of the year, when Rousseff’s second presidential term officially began, her administration’s priorities were clear: implement a credible fiscal-adjustment program that would take the primary budget balance (which excludes interest payments) comfortably back into surplus and reduce the growth rate of public debt to sustainable levels. Rousseff soon appointed an economic team associated with fiscal orthodoxy to lead the effort.