Brazil Real Drops Most Among Major Tenders on Congress Paralysis

  • Detention of government senator delays fiscal target vote
  • Currency worst-performing among major curriencies this year

Brazil’s real dropped the most among major currencies as the arrest of a ruling-party senator this week threatened to sidetrack President Dilma Rousseff’s economic agenda.

The arrest of the government’s leader in the Senate, Delcidio Amaral, has delayed voting on a new fiscal target that would allow the government to end 2015 with a deficit of 119 billion reais ($31.7 billion) before interest payments. If Congress doesn’t pass the measure, the government risks breaching budget rules. That could spark a new round of requests to impeach Rousseff.

The real declined 2.7 percent to 3.8466 per dollar in Sao Paulo, extending its weekly drop to 3.7 percent, the biggest for a week since Oct. 16. The currency is down 31 percent this year on concern the government will struggle to ward off credit-rating cuts as the country is stuck in the middle of its longest recession since the 1930s. One-month implied volatility was 20.4 percent, the highest among 16 major tenders tracked by Bloomberg.

"What we have now is this hangover after all these arrests, which caused a paralysis in Congress and worsened the political imbroglio," said Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo. "Not a single step has been taken to consolidate the budget amid deepening political frictions, and there is this feeling that this mess is far from over, which increases aversion toward Brazilian assets."

The currency extended its decline after newspaper o Estado de S.Paulo said in a report that Otavio Marques de Azevedo, CEO of Andrade Gutierrez SA, will name at least two senators in a graft probe involving state-controlled oil producer Petroleo Brasileiro SA and some of the nations biggest construction companies. The newspaper did not say how it got the information.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, rose 0.12 percentage point to 15.66 percent. They are up 0.45 percentage point this week.

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