Brazil Seen Backtracking on Budget Cuts Stokes Bondholder Angst

  • Investors are also concerned Brazil won't meet fiscal target
  • Brazil's local bonds have lost 2.5% in dollars since Feb. 5

Bond investors are getting worried that Brazil won’t make the budget cuts needed to pull the country out of its financial tailspin.

Its real-denominated bonds have lost 2.5 percent in dollars since Feb. 5, when Planning Minister Valdir Simao told the Folha de S. Paulo newspaper that spending reductions this year will be smaller than in 2015. The report came amid deepening speculation Brazil will also fail to meet its fiscal target.

President Dilma Rousseff, who’s facing impeachment, is trying to rein in a widening deficit at a time when the economy is mired in its deepest recession in more than a century. On Tuesday, she threatened to seek more tax increases if Congress fails to approve a proposed levy on financial transactions, warning that spending cuts have reached their limit, O Globo newspaper reported.

“Besides not reaching the fiscal goal, the government is once again changing the rules in the middle of the game,” said Paulo Nepomuceno, a fixed-income strategist at Coinvalores CCVM in Sao Paulo. “This is exactly what they shouldn’t do.”

Press offices for Brazil’s presidency and Finance Ministry didn’t respond to e-mails seeking comment on budget cuts and this year’s fiscal goal. Brazil’s real gained 0.7 percent Wednesday to 4.0394 per dollar as of 8:35 a.m. in New York.

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