Brazil Real Weakens as Spending Vote Increases Fiscal Concerns

  • Another vote on presidential vetoes to be delayed to next week
  • Real falls most among emerging-market currencies Thursday

Brazil’s real weakened the most among emerging-market currencies after lawmakers approved amendments to a retirement bill that would boost government spending, dealing a blow to efforts to shore up the country’s finances.

The real dropped 1.6 percent to 4.0095 per dollar in Sao Paulo, ending two days of gains. The real is down 34 percent this year, the most among developing nations, amid concern the government will struggle ward off credit-rating cuts as the country heads into its longest recession since the 1930s.

The Lower House approved a measure that makes it easier for workers to retire at a younger age receiving full benefits and allows retirees to boost pensions by taking on a new job. The bill still needs Senate approval. President Dilma Rousseff’s efforts to trim spending and raise taxes have met resistance from lawmakers concerned that the moves will hurt Brazil’s middle class. Congress on Wednesday postponed a key vote on presidential vetoes of spending bills, delaying a showdown until next Tuesday.

“The default mood in Brazil is sour and yesterday’s fiscal adjustment defeat isn’t helping,” Christian Lawrence, a currency strategist at Rabobank, said from New York.

Rousseff used vetoes earlier this year to block salary increases and pension payouts that would have boosted government spending by 63 billion reais ($16 billion) over four years. The administration has been negotiating with lawmakers for weeks to uphold its vetoes, arguing the legislation would strain government finances.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, rose 0.17 percentage point to 15.77 percent.

While the vote on retirement rules was a defeat for Rousseff, the opposition also suffered a blow when Brazil’s public prosecutor said it is looking at Swiss bank accounts in connection with an investigation of alleged corruption and money laundering by lower house President Eduardo Cunha. Cunha has said in the past that the accusations are without merit. He declined to comment to journalists in Brasilia on Thursday.

Cunha has been one of the administration’s largest adversaries in Congress and this investigation could cause him to step down, according to Joao Paulo de Gracia Correa, a foreign-exchange manager at SLW Corretora de Valores.

"The government is paralyzed and Cunha has a great deal of responsibility in blocking attempts to get the fiscal measures approved," Correa said from Curitiba. "While it is still early to say, if he does end up leaving, the government could have better chances of having its fiscal plan accepted."

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