Political Crisis, Increased Risk and Official Reactions

BRAZIL ECONOMICS - Report 10 Aug 2015 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

In recent weeks, Brazil’s CDS quotations have risen steeply. This movement has been prompted not only be the loosening of fiscal policy, reflected in the new primary surplus targets, which has raised the likelihood the country will lose its investment grade rating, but also by the worsening political crisis. With the recession deepening, with President Rousseff’s approval ratings falling to the lowest levels seen in the country’s modern history, and with the erosion of congressional support, the political crisis is worsening, making it even harder to win approval of any corrective measures in the economic space. Since July 22nd – when the reduction of the primary surplus targets was announced – the quotation of Brazil’s 10-year CDS has risen by nearly 50 basis points, while those for Turkey and Mexico have gone up by 33 and 9 points, respectively (Graph 1).

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