Brazil Real Tumbles on Concern Government Lax on Budget Deficits

Brazil’s real fell the most among emerging-market currencies and swap rates surged on concern the government isn’t doing enough to control budget deficits and avoid a credit rating cut.

The real dropped 1.9 percent to 2.2890 per U.S. dollar, deepening its one-month selloff to 3.4 percent, the worst among 16 major currencies tracked by Bloomberg. Swap rates on contracts maturing in January 2016 climbed 15 basis points, or 0.15 percentage point, to a two-year high of 11.54 percent on concern that widening budget shortfalls will lead to an increase in borrowing costs.

Government officials defended their fiscal policy after a report last week showed that the deficit swelled in September to almost the widest level since the global financial crisis in December 2008. Treasury Secretary Arno Augustin said Brazil will meet its targets amid a “speculative attack” fueled by media reports suggesting the government has lost control of its budget, according to Agencia Estado.

“This is the market’s response to a government without credibility and without anyone in command,” Paulo Petrassi, managing partner at Leme Investimentos, said in a phone interview from Florianopolis, Brazil. “The market is reacting to the authorities’ response to worsening fiscal data.”

Brazil reported last week a budget deficit of 22.9 billion reais in September, wider than the 19.3 billion reais median forecast of economists. The gap was 23.3 billion reais in February, the deepest since the global financial crisis in December 2008. As a percentage of gross domestic product, the deficit increased to 3.3 percent, the largest since 2009.

Rating Outlooks

Standard & Poor’s and Moody’s Investors Service lowered their outlooks this year on Brazil’s credit, which both companies rate at two levels above junk.

Brazil’s Chief of Staff Gleisi Hoffmann said in an interview with Folha de S. Paulo that she supports a proposal to adopt a range for the primary budget surplus target, which excludes interest payments. The presidential press office didn’t respond to a request for comment.

Swap rates rose earlier after central bank President Alexandre Tombini said yesterday in Fortaleza, Brazil, that policy makers must be “especially vigilant” on inflation, adding to speculation that policy makers will increase the target lending rate to 10 percent this month. High inflation reduces the potential for economic growth and the generation of jobs and income, Tombini said.

“The logical interpretation is that policy makers will continue their monetary tightening following Tombini’s latest comments,” Cristiano Oliveira, the chief economist at Banco Fibra SA in Sao Paulo, said in a telephone interview.

Borrowing Costs

The central bank raised the benchmark rate by 2.25 percentage points to 9.50 percent this year, the most among 49 nations tracked by Bloomberg. After policy makers increased borrowing costs by a half-percentage point for a fourth straight time, annual inflation slowed to 5.75 percent through mid-October, still higher than target.

The central bank announced on Aug. 22 a $60 billion intervention program of currency-swap and credit-line auctions to buoy the currency and curb import price increases. Brazil extended the maturities on only about $6 billion of the $8.9 billion of swaps that matured Nov. 1.

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