Where in World Is Brazil’s Levy? Head-Cold Claim Spurs Bond Rout

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In Brazil, the finance minister’s cold has suddenly become a big concern for bond investors.

The issue arose last week when Joaquim Levy, hailed on his appointment in January as a budget hawk, skipped an event announcing a 69.9 billion real ($22.1 billion) spending freeze. He had sought a bigger cut, and speculation that his absence signaled discord pushed up Brazil’s borrowing costs twice as much as average for emerging markets this week.

In a country trying to preserve its investment-grade rating, any hint of friction within the government is enough to rattle investors looking for a commitment to rein in deficits. Even after Levy said Monday that he was absent only because of a cold, doubts remain about whether he has the wherewithal to persuade members of a fractious coalition in Congress to cut spending and raise taxes as much as needed.

“We are clearly witnessing noise and tension within the government this week, mostly around the fiscal reform,” Alejo Czerwonko, a strategist at UBS Wealth Management, which oversees $1 trillion of assets including Brazil bonds, said from Bogota. “Investors have reason to be worried.”

Government officials are doing their best to reassure them. Budget Minister Nelson Barbosa said Wednesday that there was no disagreement, and President Dilma Rousseff took time out of her state trip to Mexico this week to dismiss speculation that Barbosa and Levy are at odds over economic policy.

Full Support

An official who has direct contact with Levy said Thursday that the finance minister believes he has Rousseff’s full support for austerity measures and he hasn’t considered resigning. The official, who asked not to be identified because he isn’t authorized to speak publicly about the matter, acknowledged that Levy skipped the press conference to protest the lack of support from Rousseff’s allies in Congress.

The Finance Ministry declined to comment on the performance of Brazil’s bonds this week. The president’s office didn’t reply to a phone call and an e-mail seeking for comment.

In April, Rousseff named Vice President Michel Temer, a member of the ruling alliance’s Brazilian Democratic Movement Party, or PMDB, to be her liaison on Congress and take over negotiations with lawmakers who object to cuts mostly for social-welfare programs.

Prices of Brazilian assets show investors are unconvinced Levy can make good on pledges to rein in the largest budget gap in 16 years and post a surplus this year excluding interest payments of 1.1 percent of gross domestic product.

Doing so is crucial amid warnings from Fitch Ratings, Standard & Poor’s and Moody’s Investors Service that fiscal issues are a threat to creditworthiness.

Levy’s Proposals

Yields on Brazil’s dollar-denominated sovereign bonds have climbed 0.1 percentage point the past week, twice the average for emerging markets. The real dropped 0.6 percent to 3.1829 per dollar Friday as of 3:22 p.m. in New York, the weakest level on a closing basis since March 31.

“It is hard to believe that things are 100 percent aligned within the government,” said Paulo Nepomuceno, a fixed-income strategist at Coinvalores in Sao Paulo. “That is pressuring Brazilian assets.”

The finance minister has been pushing proposals in Congress to cap social security benefits that total as much as 27.3 billion reais in a year. Other goals of the budget freeze include reductions in current expenditures, discretionary spending in Congress and some infrastructure programs.

Key Bills

Thursday, the administration scored a breakthrough in the drive to shore up public accounts when Congress approved the third in a series of key bills to cut spending and raise taxes.

But just two days earlier, members of the lower house amended a bill that reduces jobless benefits to allow some workers to retire earlier, frustrating Levy’s efforts.

“Levy stepping down would definitely be a downside for Brazil, and Rousseff has a lot to lose if that happens,” Czerwonko said. “Now, it’s necessary to look through the noise and focus on the fiscal improvements. Will they be enough to please markets and rating agencies?”

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