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A Panicked Brazil Promises Billions In Austerity, Does 180 On Budget After Downgrade

Tyler Durden's picture




 

Exactly two weeks after conceding that a primary surplus was no longer in the cards after budget data in July came in meaningfully worse than expected, Brazil is scrambling to restore some semblance of confidence in the government’s ability to close a yawning budget gap by implementing austerity even as political turmoil has made embattled FinMin Joaquim Levy’s life a living hell of late. 

On the heels of a painful S&P downgrade, Brazil now says it plans to enact some BRL26 billion in primary spending cuts for the 2016 budget on the way to achieving in a primary surplus that amounts to 0.7% of GDP.

In other words, a complete 180 from what the government said prior to the downgrade.

Needless to say, reconciling tax increases and budget cuts with the party mandate won’t be easy. “Budget cuts and tax increases discussed by govt in response to Brazil’s credit rating downgrade don’t agree with central tenets of Workers’ Party,” Bloomberg notes, citing an unnamed party official. 

Particularly divisive will be the CPMF revival which isn’t likely to be approved. Here’s Bloomberg with a bit more on the announcement: 

Finance Minister Joaquim Levy proposed a new round of spending cuts and tax increases that are designed to close the budget gap and protect Brazil from further credit downgrades.

 

The government will reduce 26 billion reais ($6.8 billion) in expenditures from next year’s budget in large part by capping salaries of civil servants and suspending exams for new entrants, Levy said Monday. Brazil also plans to raise 28 billion reais in revenue by boosting taxes, including a levy on financial transactions.

 

“We know this effort to cut spending will only take us so far, so as would happen in any country in the world in a moment of reduced economic activity and tax income, you have to seek out other resources,” Levy told reporters. “We’re trying to find that balance.”

 

Obviously, the market will cast a wary eye towards the effort even as one assumes Brazil is to be applauded for trying, especially given the hugely contentious political environment and the threat of further social upheaval. 

And here's Goldman with the full breakdown:

The authorities announced today a number of spending cuts and expenditure saving measures (worth an estimated R$26.0bn) and tax increases and a reduction of a number of tax breaks/benefits (estimated to yield approximately R$45.8bn). The key objective is to improve the federal government fiscal balance from the -R$30.5bn (-0.5% of GDP) deficit announced on August 29, to a +R$34.4bn (+0.55% GDP) surplus.

 

Most of the proposed adjustment will come from higher taxes; particularly from the reinstatement of the controversial Financial Transactions Tax at a rate of 0.2% which is expected to yield a substantial R$32bn.

 

Minister Levy stated that the tax should “not last more than 4 years.” Furthermore, approximately R$10bn will come from the reduction in projected outlays with civil servants which is likely to elicit strong rejection by the main public sector unions.

 

Many of the measures require Congressional approval of several pieces of legislation which, in our assessment, adds significant implementation risk. Given the administration record low level of popularity and its weak and increasingly fragmented support base in Congress we expect some of these measures to face significant resistance (to be either rejected or watered down during the legislative debate), particularly the approval of the widely rejected CPMF tax.

 

In all, we expect the 2016 budget discussion to be a drawn-out, jumpy and noisy process with a significant risk that only a subset of the proposed measures will clear Congress and with fiscal yields below the government proposal. Furthermore, we could not fail to notice that in today’s announcement there were no medium- and long-term fiscal measures to arrest the projected upward drift in mandatory spending (e.g., social security reform).

 

Overall, we remain of the view that a deep, permanent, structural fiscal adjustment remains front-and-center on the policy agenda to restore both domestic and external balance. In our assessment, at the end of the fiscal consolidation process Brazil needs to end up with a primary surplus of 3.0% to 3.5% of GDP (which is still quite distant from today’s fiscal reality). This would be the level of primary surplus that would put gross public debt on a clear declining trajectory; something that is required for Brazil to rebuild fiscal buffers and regain policy room to use fiscal counter-cyclically, whenever needed and appropriate.

 

Given the very slow pace of fiscal consolidation, and its poor quality geared towards tax hikes and investment cuts), the burden of current account adjustment will likely continue to fall disproportionately on monetary policy and the BRL.

The question now, is whether this was a good move.

That is, is it better to simply stick with the projection of a primary deficit and let the market be pleasantly surprised if things miraculously turn a corner, or is it better to try and head off further pressure on the country's credit rating by rolling out a largely non-credible plan to plug the budget gap and risk surprising on the down side?

We'll see, but at least in the short term, Goldman is probably correct to assume that in the absence of a stable political situation, the BRL will remain in focus and if FX pass-through picks up and the Fed hikes, we may need to see a Selic hike. 

For an indication of how things are going, simply watch the data points on this chart:

 

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Mon, 09/14/2015 - 19:24 | 6548608 22winmag
22winmag's picture

Some folks will be voting from rooftops!

Mon, 09/14/2015 - 19:26 | 6548612 Divine Wind
Divine Wind's picture

 

 

 

With Olympics coming?

Austerity?

HAHAHAHAHAHAHAHAHAHAHAHAHAH

Mon, 09/14/2015 - 19:50 | 6548687 Beam Me Up Scotty
Beam Me Up Scotty's picture

I can't wait to watch the water events.  Watching Olympians swimming in the cess pool of Brazil.

Mon, 09/14/2015 - 20:39 | 6548774 TeamDepends
TeamDepends's picture

And the Tungsten Medal for pickpocketing goes to.... Jaime from Miami!!! Cuba takes home the Tungsten!!!

Mon, 09/14/2015 - 23:12 | 6549265 Antifaschistische
Antifaschistische's picture

every four years some broke-ass over indebted country puts on this show....and almost every time they seem to pull some rabbit out of a hat and get it done.   I wonder....is this going to be the first big olympic fail?

If so...just think of what the 2020 Tokyo olympics will trigger...an even grander can't fail event that cost even more and truly destroys Japan in the process.

This is going to get ugly..

Mon, 09/14/2015 - 20:51 | 6548803 nmewn
nmewn's picture

They've scheduled a few new events for the world television audience, the last leg of the womens 4X100 relay passes through a "favela" (no, they're not allowed to bring their personal weapons) and in the men's 100m freestyle they have to hurtle themselves out of the cess pool over a silt fence!

Should be riveting viewing ;-)

Mon, 09/14/2015 - 22:22 | 6549117 A Nanny Moose
A Nanny Moose's picture

Piranha the dread Crock-o-stimpy, and new bacteria strains. Now that might be an Olympikz worth watching.

Tue, 09/15/2015 - 08:34 | 6549946 Fukushima Fricassee
Fukushima Fricassee's picture

If the Obamas attend they will have at least 4 additional turds to deal with.

Mon, 09/14/2015 - 19:57 | 6548703 Salsa Verde
Salsa Verde's picture

Is kidnapping and ransom an Olympic event?  It will be soon!

Mon, 09/14/2015 - 20:47 | 6548792 CheapBastard
CheapBastard's picture

I can't blame some of them for kidnapping [hopefully bankers and not people]. Inequality there is astronomical. In Merika, someone is "poverty stricken" and "starving" if they don't have a Popeye's or Burger or Krispy Kreme every 2-3 hours. There, some kids don't eat but what they steal out of a trash bin.

 

Just say'n

Mon, 09/14/2015 - 21:02 | 6548841 rollingon
rollingon's picture

How they even won the Olympics is a mystery to me. I understand that they want to try to give every country a chance including lesser developed one, but I think there could have been better choices. Brazil is out of the way of so many flights. Crime has always been a concern for anyone traveling there. I mean there is a list of serious concerns even without factoring in the new financial mess. Somebody failed to properly research the situation or got paid off.

Mon, 09/14/2015 - 19:27 | 6548618 surf0766
surf0766's picture

Toooooooooooooo late marxists. Your country is a pile of crap.

Tue, 09/15/2015 - 08:37 | 6549959 Fukushima Fricassee
Fukushima Fricassee's picture

Said God to the USA.

Mon, 09/14/2015 - 19:31 | 6548627 Jack Burton
Jack Burton's picture

I know zero about Brazil, but it sounds like everywhere else, if you can't print money, you are screwed. USA is worse off than any nation, yet is doing great, just printing, and printing and printing and going to war. USA is the envy of the world. Printers make better lovers!

Mon, 09/14/2015 - 19:39 | 6548656 negative rates
negative rates's picture

Really, the world despises this country, and for all the right reasons too.

Mon, 09/14/2015 - 21:15 | 6548884 EBT excepted
EBT excepted's picture

but dey keep a comin', dey keeps ovahstayin' dey visa...

Tue, 09/15/2015 - 02:33 | 6549552 Vylahkinnen
Vylahkinnen's picture

I am not coming. Why would I? We got a million new people in Europe - just arrived! Do you understand? A million! Mostly young men from Afghanistan, Iraq, Syria, Libya...we got them. I've seen them. Tough young boys. They've crossed mountains, deserts, seas and escape war...this is like an invincible army, my friend.

And they are an enrichment to our society...they will work, they will pay taxes, they will create business, they will be Neubuerger! - we are on the verge of becoming the greatest continent EVAR!!! Don't you FUCKING see? We are...what India never could be...China almost became...we are...let me rephrase this.

Listen, all these new people need beds, they need clothes, shoes. There will be a huuuuge booooom! All I can say is - Al-?amdu lill?h!

Of course - some of them can't even read. I understand. You are worried that in a highly technological society...but..those buildings in New York - they were not built by people with a masters degree in philosophy...am I right, am I right? We can now build entire new cities! Isn't this exciting?!

Tue, 09/15/2015 - 02:35 | 6549555 Vylahkinnen
Vylahkinnen's picture

Oh and by the way...by the way - they didn't go to the United States! You understand?! They chose us! Well, at least that's what was printed in the papers...I mean...I am no expert but....all I am saying is....this is a....a....a....chance!

Tue, 09/15/2015 - 05:49 | 6549682 SmittyinLA
SmittyinLA's picture

Detroit was an immigrant destination city, all the new immigrants brought with them their predictable socialist voter demographics from their former fucked up countries, and predictably did the exact same thing to Detroit, now all the socialist bankers own Detroit, the citizens are now tenants harnessed with debt for eternal slavery, and with every vig payment diverted to acquiring more debt they'll never escape, might as well move out of state.

Mon, 09/14/2015 - 19:57 | 6548700 XqWretch
XqWretch's picture

Right, I was just about to say, who the fuck is in charge there? CUT spending? Wrong direction morons! SPEND MORE! BREAK SOME FUCKING WINDOWS!!!

Mon, 09/14/2015 - 19:59 | 6548710 nmewn
nmewn's picture

From what little I know about it, it was a former colony of the Portugese monarchy (that would be Europe for you people playing along at home) then it went full retard crony-socialist and now has a "Brazilian economist" (whatever the fuck that is) for a President.

Mon, 09/14/2015 - 20:51 | 6548801 Bangin7GramRocks
Bangin7GramRocks's picture

The fact that Portugal ever ruled over any other land is so fucking comical. History is so goddamn silly. Fucking Portugal. Ha!

Mon, 09/14/2015 - 20:57 | 6548813 nmewn
nmewn's picture

Yeah, that whole Portugese-Spanish monarchy thingy was a real piece monarchial work, right up there with the Dutch, English & French.

Don't even get me started on the Pasha's & Sultans ;-)

Mon, 09/14/2015 - 20:19 | 6548730 Joe Mama 3
Joe Mama 3's picture

Fin minister named " Levy "    !!!!!!!!!!     All ya need ta know, playa !!!!!!!!!

Mon, 09/14/2015 - 20:33 | 6548760 TeamDepends
TeamDepends's picture

Joaquim Shlomo Levy no doubt lives in a huge casa, far from the corrugated-tin shacks.

Mon, 09/14/2015 - 20:56 | 6548814 silverer
silverer's picture

Problem with the US is that it has worn out its welcome as a reserve currency.  When somebody else owns the rights to the press, the US will be in the shitter worse than any other country in history.  With a 108% debt to GDP, and now the loss of the reserve status, we will have to pay 20 to 40% more for goods from the rest of the world.  If it's China that is the reserve, they will be exporting their inflation to the US for the next 20 to 40 years, just like the US has done for decades to the whole rest of the world.  It didn't have to end this way, but that's what happens when you elect dynasty families to run a country and let politicians and corporations run it all their way.

Mon, 09/14/2015 - 21:10 | 6548867 Escrava Isaura
Escrava Isaura's picture

 

 

Jack Burton

Insightful post. You're correct, in my opinion.

Just would like to add this quote by MEFOBILLS: “Never let you debt pointing outside of your law .”

 

Mon, 09/14/2015 - 21:22 | 6548908 mr.n3utr0n
mr.n3utr0n's picture

The dollar is our currency, but it's everyone else's problem

Mon, 09/14/2015 - 21:28 | 6548928 johnconnor
johnconnor's picture

as long as you have countries/people using/buying your printed money everything is peachy... until it is not.

 

Mon, 09/14/2015 - 21:36 | 6548955 EBT excepted
EBT excepted's picture

and if'n you CAN preent d'munee, you be screw too...do it d'ol' fashion way, go down to wahr and plundah it...

Mon, 09/14/2015 - 19:48 | 6548684 Redart
Redart's picture

48 billion reais? Austerity? Please, spare me the details. What a laugh

Mon, 09/14/2015 - 19:50 | 6548686 cougar_w
cougar_w's picture

And on Thursday they get to find out what The Fed is going to do to them.

Watch what happens next, people. End of an age.

Mon, 09/14/2015 - 19:59 | 6548704 libertysghost
libertysghost's picture

PhD from Univ of Chicago...almost a decade between the IMF and ECB...and Brazil is about to be fleeced by the bankster cartel's "credit rating downgrade". It's funny how all these supposed "fiscal hawks" that come out of these schools and "institutions" end up in "emerging economies" and not running the US or Europe. Sounds like everything pretty much on schedule to me.

Mon, 09/14/2015 - 20:43 | 6548782 Escrava Isaura
Escrava Isaura's picture

 

 

libertysghost

Could you please elaborate?

 

Very curious about your statement of “credit fleece by downgrading” and “on scheduling”.

  

Looking forward hearing back from you.

 

Thanks.

 

Tue, 09/15/2015 - 05:44 | 6549680 HowdyDoody
HowdyDoody's picture

S&P ratings? The best ratings money can buy.

Mon, 09/14/2015 - 19:59 | 6548708 youngman
youngman's picture

If they just cut out half of the corruption they could have a surplus

Mon, 09/14/2015 - 20:07 | 6548716 nmewn
nmewn's picture

Shhh, you're not supposed to say anything like that, they're "evolving". 

Petrobas to the moon!!!...lmao!

Mon, 09/14/2015 - 21:49 | 6548988 ThroxxOfVron
ThroxxOfVron's picture

They will get the taxes but not the reductions in pay of 'civil servants' because the 'civil servants' will become quite UNcivil in very short order...

The taxpayers always get fucked and the bureaucrats seldom to never.

Tue, 09/15/2015 - 06:08 | 6549692 TeraByte
TeraByte's picture

What corruption, my friends just want to donate money.

 

Mon, 09/14/2015 - 20:04 | 6548714 falconflight
falconflight's picture

anyone banking on the BRICS taking over with their Banksters in charge are losing their shirts to the Western Shorts.  No really.  There are no survivors to the coming tsunami, unless it's a matter of who is least destitute.  

Mon, 09/14/2015 - 20:26 | 6548745 willwork4food
willwork4food's picture

Yes there will be survivors-the "elite chosen ones" behind every CB in the world.  Bets on what happens next?

Mon, 09/14/2015 - 20:45 | 6548788 homeskillet
homeskillet's picture

What is the best solution for an economically unstable country? Host the FIFA World Cup and the Olympics in the span of a few years. Sure to get you back in the black.

Mon, 09/14/2015 - 22:32 | 6549156 tarabel
tarabel's picture

 

 

Financial frostbite. Black, indeed.

Mon, 09/14/2015 - 20:53 | 6548806 hotrod
hotrod's picture

BRICS gotta learn to tell rating agencies to stick it like the USA

Mon, 09/14/2015 - 21:11 | 6548872 Gerb00
Gerb00's picture

Bend over boys you are fixing to get a good Grecia corn holeing.....

Mon, 09/14/2015 - 21:14 | 6548880 MalteseFalcon
MalteseFalcon's picture

Big country.  Lots of resources.  Could be self-sufficent.  At peace for 200 hundred years.  Lots of cheap labor.

No excuses really.  The people running the joint are incompetent and corrupt.

Mon, 09/14/2015 - 22:31 | 6549152 tarabel
tarabel's picture

 

 

A Brazilian division served in Italy during WWII.

Doesn't detract from the veracity of your larger point, however.

Tue, 09/15/2015 - 09:49 | 6550269 MalteseFalcon
MalteseFalcon's picture

Brazil itself has not been subjected to meaningful warfare.

Mon, 09/14/2015 - 21:21 | 6548903 q99x2
q99x2's picture

Bend over Brazil. Here comes Lloyd Blankfein and Goldman Sachs.

Mon, 09/14/2015 - 21:35 | 6548951 I AM SULLY
Mon, 09/14/2015 - 21:43 | 6548970 yogibear
yogibear's picture

When are these corrupt rating agenciies going to downgrade the US?

Fitch?

Moody's ?

S&P?

These are US politicized PC agencies. 

Guess Eric Holder whipped S&P really good after they threatened to downgrade the US.

Mon, 09/14/2015 - 22:36 | 6549168 nakki
nakki's picture

Brazil went bankrupt more times in the last century than Liz Taylor got married. More times than Steve Howe got suspended and reinstated by MLB. They'll shit the bed and then be everyone's darling, all within the next 3-4 years. Same as it ever was.

 

Tue, 09/15/2015 - 02:20 | 6549538 Teh Finn
Teh Finn's picture

When a society goes totally "ass-centric" the end is nigh.  Brazil now, and America soon.

Tue, 09/15/2015 - 05:13 | 6549662 SmittyinLA
SmittyinLA's picture

Say anything, https://m.youtube.com/watch?v=JFvujknrBuE the bankers will accept it, they get paid on commissions.

Tue, 09/15/2015 - 08:35 | 6549948 MilwaukeeMark
MilwaukeeMark's picture

And so we hit the iceberg because of hubris and an unwillingness to heed the navigational warnings. The bankers, corporate elites and globalists, to escape the rising icy sea water are climbing higher and higher for the safety of the upper deck cabins. But at some point it all goes to the bottom and even those drifting in the lifeboats never get rescued. Once flailing in the icy sea water, looking for any piece of drift wood to hang on to, all are now again equal.

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