Not Even 'Scissorhands' Can Cut Brazil Out of Its Fiscal Trap

Updated on

Joaquim Levy was supposed to be the man who would save Brazil’s finances. A University of Chicago-trained technocrat who earned the nickname “Scissorhands” for his tough budget-cutting policies, he strode into the Finance Ministry in January with a mandate to preserve the country’s precarious investment-grade rating.

Now, eight months later, with Congress refusing to back key parts of his austerity plan and dissent growing within President Dilma Rousseff’s own cabinet, speculation is rampant that Levy will resign. When word got out Thursday afternoon that he would skip the upcoming meeting of G-20 finance ministers in Turkey -- a decision he’d reverse later in the day -- those concerns reached a fevered pitch. Traders pushed down the currency 0.6 percent in three minutes. Hours earlier, the Treasury canceled its weekly debt auction for the first time in over a year.

Rousseff is doing her best to quell the speculation. Levy, after all, is the lone figure in her government who has the true and unwavering support of investors. If he exits, the thinking goes, then any chance that Brazil has of shoring up its finances and averting a downgrade to junk disappears.

On Wednesday, she barked at reporters who asked whether Levy would resign, telling them it was “a disservice to the nation” to suggest he is “isolated” in her administration. The next day, her cabinet chief, Aloizio Mercadante, echoed those same sentiments after a meeting with Levy and Rousseff in the presidential palace. Levy’s position on the matter is less clear. While Spain’s El Pais reported that he denied he’d resign in a Wednesday interview, he has made no public statements on the matter this week. The Finance Ministry’s press offices didn’t respond to a request for comment.

Amid the speculation, the country’s fiscal picture just keeps worsening. On Monday, Levy told lawmakers the government wouldn’t even be able to deliver a budget surplus he had pledged for next year when interest payments are excluded (a measure called the primary surplus that Brazilians focus on). When interest payments are factored in, the deficit equaled a staggering 8.8 percent of gross domestic product in July, the worst figure in at least two decades.

“The market really trusted him,” Alberto Ramos, the chief Latin America economist for Goldman Sachs Group Inc., said from New York. “Levy is persistent, so if he fails to drive through the adjustments needed, it’s a very bad sign. If he can’t do it, then who can?”

Recession, Scandal

After rebounding late in Thursday’s session, the currency resumed its slide on Friday, sinking 2.9 percent to 3.85 reais per dollar. It’s down 7 percent this week and 31 percent on the year, more than any other major currency in the world. Yields on the government’s benchmark 10-year bonds have soared to more than 15 percent in the local market. A year ago, they traded at just over 11 percent.

In many ways, Levy’s task was daunting from the moment he took office. Not only was the country already sliding into recession -- the result of plunging prices for Brazil’s commodity exports and four years of Rousseff’s interventionist policies -- but a corruption scandal emanating from the state-run oil giant was spreading fast.

It has since paralyzed some of the country’s biggest companies, deepening the economic slowdown, and more importantly, soured relations between Congress and the president. Rousseff is facing calls for impeachment while the heads of both houses of Congress have been ensnared in the widening probe. Fiscal austerity hasn’t been a real priority for most of the key players in Brasilia.

Earlier Episode

This isn’t the first time that Levy has spooked the markets by hinting he’s unhappy. Back in May, speculation also swirled that the minister may resign after he skipped a meeting announcing a spending freeze that fell short of what he’d wanted. And perhaps the announcement late Thursday that he would attend the G-20 meeting in Turkey after all signals that this Levy crisis may too have passed. But for how long?

Two government officials who regularly speak with Levy said earlier this week that he has been losing patience with the lack of support within the administration for more aggressive fiscal measures. Several of his proposals to raise taxes or cut spending have been blocked by colleagues, the president or congressional leaders, according to the officials, who asked not to be named because the matter is private. In the latest setback he suffered, the government scrapped efforts over the weekend to revive a financial transactions tax after lawmakers expressed their opposition.

“Seeing Levy leave would be worse than seeing Rousseff step down,” said Guilherme Esquelbek, a currency trader at Correparti Corretora de Cambio in Curitiba. “His departure is the worst scenario we could have right now.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE