In Brazil, Bears Say It's Way Too Soon to Celebrate Impeachment

  • Bonds, stocks and currency gain after impeachment initiated
  • The economy is mired in deepest recession in 25 years

Investors giddy at the prospect of Brazil President Dilma Rousseff’s ouster may be getting ahead of themselves.

A day after a lawmaker initiated impeachment proceedings, Brazil’s stocks, currency and bonds rallied on optimism the move could lead to the end of a political crisis that’s stymied desperately needed fiscal reforms.

But the push to remove Rousseff from office may only make matters worse for a country hamstrung by its worst recession in a quarter century and an ever-widening corruption scandal, according to GAM UK Ltd. and Spiro Sovereign Strategy.

Standard & Poor’s cut Brazil’s rating to junk on Sept. 9 as Rousseff’s government struggled to win support in Congress for austerity measures aimed at stemming the deterioration of the nation’s finances.

“This seems premature to me,” said Paul McNamara, a money manager at GAM UK Ltd., which oversees $25 billion including Brazilian bonds. “The most likely short-term outcome is political paralysis and that’s not good for a country in Brazil’s position right now.”

While the real extended gains on Friday, climbing 0.4 percent as of 11:15 a.m. in New York, the Ibovespa stock gauge dropped 2.8 percent.

Lower house chief Eduardo Cunha said on Wednesday that he accepted a request to impeach Rousseff, triggering procedures that may take months and involve several votes in Congress. The request accuses Rousseff of breaching Brazil’s fiscal responsibility law in 2014 and 2015, including doctoring fiscal accounts. It also says her campaign received funds that stem from fraudulent activities. 

Rousseff, who started her second term in January, has denied any wrongdoing and said the arguments in favor of impeachment were groundless. She told reporters on Thursday that she was “outraged” by Cunha’s decision.

“This request is unjustified,” she said. “I committed no illicit acts.”

On Thursday, Brazil’s borrowing costs fell, with the extra yield investors demand to own its dollar-denominated bonds instead of U.S. Treasuries narrowing 0.06 percentage point, to 4.55 percentage points, according to JPMorgan Chase & Co. One-year credit-default swaps also fell. The stock market had its biggest gain in a month, while the real rose 2.1 percent against the dollar.

“It’s unclear whether it could act as a catalyst for reform or would make matters significantly worse,” said Nicholas Spiro, a London-based managing director at Spiro Sovereign Strategy. “Things have deteriorated to such an extent -- politically, economically and financially -- that it’s difficult for investors to take a view on what the best way forward is for Brazil at this stage. Markets want stability above all else and that’s unthinkable for the foreseeable future.”

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