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A Hapless Brazil Incurs Massive Losses On FX Swaps Amid Currency Carnage

Tyler Durden's picture




 

As we’ve documented extensively of late, a host of idiosyncratic political factors have served to exacerbate what was already a very, very bad situation for emerging markets. 

This dynamic is most readily apparent in Brazil and Turkey, and although Ankara probably has a leg up in the race for “most at risk from domestic turmoil”, Brazil isn’t far behind as President Dilma Rousseff battles abysmal approval ratings and a recalcitrant Congress in an effort to shore up the country’s finances by convincing lawmakers to sign off on much needed austerity measures. 

Meanwhile, a confluence of exogenous shocks that include slumping commodity prices, depressed Chinese demand, the PBoC yuan devaluation, and the threat of an imminent Fed hike have conspired with country-specific political turmoil to send the BRL plunging and that, in turn, has put Copom in what former Treasury secretary Carlos Kawall calls “crisis mode.” 

Of course crises are often costly to combat, especially when you’re an emerging market in the current environment and when it comes to Brazil, the use of alternative measures (like effectively selling dollars in the futures market) to avoid FX reserve liquidation is now weighing heavily on the fiscal outlook. As Goldman noted earlier this week on the heels of the latest monthly budget data, “the overall fiscal deficit is tracking at a disquieting 9.2% of GDP, driven in part by the surging net interest bill, which was exacerbated by the large losses on the central bank stock of Dollar-swaps.” Here’s what Capital Economics had to say after an emergency swaps auction was called by Copom in a desperate attempt to shore up the BRL last week:

First, the size of the planned auctions is reasonably large. Up to $2bn in swaps will be auctioned in total, with auctions so far planned for today and tomorrow (with additional dates presumably added in the future). To put this into context, when the central bank first launched the programme in 2013 the weekly limit on the auctions was $2bn, but by the end it was auctioning less than $200mn a week.

 

Second, we’re not convinced restarting the FX swap programme will do much to stabilise the currency. Indeed, if anything, the initial reaction has been for the real to fall further (it is currently down by 1.8% against the dollar today). Interventions in the currency market rarely have much effect and there are particular issues with using FX swaps as a policy tool. Specifically, if the central bank gets caught on the wrong side of the trade (i.e. the real weakens further), the government will incur a fiscal cost. Losses on FX swap contracts have already inflated the government’s budget deficit by more than 1% of GDP this year, adding to concerns about the fiscal outlook.

 

Finally, the central bank (and government) is clearly becoming spooked by the fall in the real. Generally speaking, while many analysts have worried about the impact of a weaker currency, we have taken the view that it is part of the solution rather than the problem. If currency falls become disorderly, however, that complicates the issue for policymakers. It’s early days, but if the real continues to come under pressure it’s possible that the interest rate tightening cycle could be re-started at next month’s COPOM meeting.

Just how costly has protecting the BRL via swaps been, you ask? For the answer we go to BNamericas:

Brazil's central bank has already seen losses of almost 2% of GDP as a result of foreign exchange swaps, local paper Valor Econômico reported, citing fiscal data released this week.

 

The program also accounts for about 30% of the increase in gross general government debt incurred in the last year.

 

According to another local paper, Estadão, when looking at the amount spent on both swaps and line auctions, which are contracts to sell dollars with the promise of repurchasing them later with interest, the central bank has already offered 80bn reais to the market in less than one month.

 

In the 12 months leading up to August, the cost of swaps totaled 112bn reais (US$28.0bn), or four times the estimated primary deficit in the 2016 budget. It also exceeded by almost 14 times the primary surplus planned for 2015 (8.7bn reais).

 

This spending represents almost a quarter of the public sector's interest payment 484bn reais, or 8.45% of GDP in the 12 months leading up to August. The expense also puts pressure on the nominal deficit, which totaled 528bn reais, or 9.21% of GDP, a historical high. When excluding the effect of swaps, the nominal deficit would be 7.26% of GDP, still one of the highest in the emerging world.

Unfortunately for Brazil, "it is not a problem of liquidity, but of fundamentals," (to quote Barclays), meaning that the pressure on the BRL is likely to continue up to and until the picture improves in terms of commodity prices and until the Rousseff government can prove to the market that plans to get a handle on the deficit are credible. Notably, the currency rallied hard on Friday after Rousseff cut eight ministries, and committed to reduce minister salaries by 10%:

Still, this may ultimately be seen as nothing more than a cosmetic change by the market. But don't take our word for it, just ask Gustav Gorski, chief economist at Quantitas Gestao de Recursos who, according to Bloomberg, says "the ministerial reform announced today by President Dilma Rousseff is the only way to keep PMDB party in allied base [and] the impact was estimated at 1b reais by planning ministry, which isn’t enough."

In other words, the pressure on the BRL isn't likely to abate for long and as outlined above, the irony of using swaps to defend the currency is that it contributes to the very same budget deficit that's pressuring the FX market in the first place and so because that's clearly unsustainable, you can expect that in relateively short order, the trajectory shown here...

... will start to look a lot more like the trajectory shown here...

*  *  *

And because we would hate to disappoint anyone...

 

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Fri, 10/02/2015 - 13:24 | 6621581 playdoh
playdoh's picture

Only here for the click bait 

Fri, 10/02/2015 - 13:32 | 6621624 ShorTed
ShorTed's picture

yeah, and 66% of it was horrible!  just the hot chix pls.

Fri, 10/02/2015 - 13:34 | 6621631 Tonald J Drump
Tonald J Drump's picture

how do you say giggittty   giggittty  in brazilian

Fri, 10/02/2015 - 13:35 | 6621645 Bunghole
Bunghole's picture

The only thing interesting about these Brazil stories are the titties.

Fri, 10/02/2015 - 13:45 | 6621702 negative rates
negative rates's picture

That fat fuck looks like banazi after a couple shots of whisky.

Fri, 10/02/2015 - 13:52 | 6621736 nope-1004
nope-1004's picture

I'm prolly too old for twins, but I'd be ok if I died tryin'.

 

Fri, 10/02/2015 - 13:58 | 6621762 pods
pods's picture

I'd buy that for a dollar.

Fri, 10/02/2015 - 13:35 | 6621643 Dr. Engali
Dr. Engali's picture

Yeah, the dude in white is getting me wet.

Fri, 10/02/2015 - 13:54 | 6621741 pods
pods's picture

Easy Doc, he is already wearing a pearl necklace.

:)

Fri, 10/02/2015 - 13:56 | 6621752 Dr. Engali
Dr. Engali's picture

Lol....

Sat, 10/03/2015 - 17:24 | 6626244 Fish Gone Bad
Fish Gone Bad's picture

That just doesn't help my image of what "a Brazilian" is supposed to look like.

Fri, 10/02/2015 - 16:38 | 6622541 Sanity Bear
Sanity Bear's picture

I only read ZH for the articles

Fri, 10/02/2015 - 13:25 | 6621589 The Indelicate ...
The Indelicate Genius's picture

only here to say soccer still sucks.

Fri, 10/02/2015 - 13:29 | 6621614 NoDebt
NoDebt's picture

You don't like watching a 5 hour long game that ends in a score of 1-0?

Fri, 10/02/2015 - 13:34 | 6621629 Dr. Engali
Dr. Engali's picture

About the only thing that I like to do for five hours is nap...., and drink. I like to drink for five hours and then nap for five hours...., well nap for five hours after two minutes of sex. Yes that's it, drink, then sex, then nap.

Fri, 10/02/2015 - 13:40 | 6621657 Bunghole
Bunghole's picture

It beats a 3 hour NFL football game that has approximately 20 minutes of actual play, 40 minutes of waiting for the actual play and 2 hours of commercials for guys with limp dicks.

Fri, 10/02/2015 - 13:56 | 6621754 Tonald J Drump
Tonald J Drump's picture

two minutes ... what's your secret ? ?

Fri, 10/02/2015 - 14:08 | 6621802 centerline
centerline's picture

It's got be the drinking beforehand.

Fri, 10/02/2015 - 22:48 | 6623760 SoilMyselfRotten
SoilMyselfRotten's picture

He uses images of Janet Yellen dancing naked.

Fri, 10/02/2015 - 14:18 | 6621853 Agent P
Agent P's picture

My wife says to me, "Two minutes isn't enough for an orgasm."  To which I reply, "I believe I just proved you wrong."

Fri, 10/02/2015 - 14:57 | 6622059 pods
pods's picture

2 minutes?  Damn y'all must like the couch?

pods

Fri, 10/02/2015 - 13:36 | 6621654 The Indelicate ...
The Indelicate Genius's picture

ha - not really.

Soccer fans ought to find a real sport. Like rugby.

Or Gaelic football

https://www.youtube.com/watch?v=XbyaHmfazSA

Fri, 10/02/2015 - 13:38 | 6621667 Bunghole
Bunghole's picture

or lacrosse.

Fri, 10/02/2015 - 14:33 | 6621936 fockewulf190
Fri, 10/02/2015 - 13:26 | 6621596 semperfi
semperfi's picture

and what exactly do you expect from a 3rd-world sh*thole banana republic ?

Fri, 10/02/2015 - 13:28 | 6621611 NoDebt
NoDebt's picture

Same think I expect from the USA:  damned tasty bread and Ringling Bros. finest entertainment.

Fri, 10/02/2015 - 13:27 | 6621607 NoDebt
NoDebt's picture

Me looking at the pictures:  oh, yeah!... what the?... Oh, jeezuz.  In that order.

Fri, 10/02/2015 - 13:29 | 6621613 knukles
knukles's picture

So Bob Citroen's new job's running Brazil's 4X reserves?   Way to go Bobbie Boy!

Fri, 10/02/2015 - 13:31 | 6621620 abyssinian
abyssinian's picture

clicked to see picture of the pretty girls,, didn't even bother reading what the articel is about. for Real!

Fri, 10/02/2015 - 13:33 | 6621630 jon dough
jon dough's picture

DILMA!!!

Fri, 10/02/2015 - 13:38 | 6621656 venturen
venturen's picture

I will take the pair for $100k...it will be a charity donation on my tax return

Fri, 10/02/2015 - 13:37 | 6621662 The Indelicate ...
The Indelicate Genius's picture

Where was instagram when I was a teen and had to jack off 3 times a day just to not die?

https://instagram.com/biaebrancaferes/?hl=en

Fri, 10/02/2015 - 16:00 | 6622356 Rockatanski
Rockatanski's picture

they kinda have manly chins, really not all that impresive as far as hot chicks go but they probably won't get kicked outta bed for eating crackers either.

Fri, 10/02/2015 - 13:38 | 6621663 venturen
venturen's picture

"Brazil's central bank has already seen losses of almost 2% of GDP as a result of foreign exchange swaps..."

 

Going to be a good quarter for the FX riggers, Goldman annouces record profits

Fri, 10/02/2015 - 13:39 | 6621670 JenkinsLane
JenkinsLane's picture

Jailbait

Fri, 10/02/2015 - 13:44 | 6621695 Itch
Itch's picture

Men age like wine, women age like milk, Brazilian women age like fish.

Fri, 10/02/2015 - 13:47 | 6621704 Handful of Dust
Handful of Dust's picture

What can I say? Thaty's why I'm here also.

 

Why is O'Bama importing thousands of angry Moslim men when we can kindly open our ... doors to Brazil for these productive ladies who will actually contribute to our culture??

 

Looks to me they have alot to offer.

Fri, 10/02/2015 - 13:59 | 6621766 Glass Seagull
Glass Seagull's picture

 

 

 

JBS is way overhedged-short the BRZ and this hedge is paying in spades.  They very likely have had lots of hat tips from monetary authorities and fin ministers.  Totally the company's style, and just another case of corporate-statism gone awry.

Fri, 10/02/2015 - 14:13 | 6621811 PrimalScream
PrimalScream's picture

The pain for Brazil is not over - not by a long shot.

Think about all those people (foreigners from Europe and USA) who speculated in Brazilian real estate.  That market was climbing steadily - rising land values.  Even if those land prices held steady now, there will be BIG losses due to currency exchange.  So the real estate speculators are already getting killed.  And the truth is that the Brazilian real estate markets and the stock market will plunge.  It's a future bloodbath.

There is really no point in the Brazilian Government throwing "bad money after good" into currency swaps. The next three years will just be a period of economic torture for them.

Fri, 10/02/2015 - 14:24 | 6621892 Pyrrhus
Pyrrhus's picture

We really aren't going to get the full-sized version of the first pic?

Fri, 10/02/2015 - 14:39 | 6621962 Vlad the Inhaler
Vlad the Inhaler's picture

Type this into Google image search:  bia and branca feres

Fri, 10/02/2015 - 15:04 | 6622095 ACJ
ACJ's picture

Heads up from a brazilian:

at least 40% of the brazilians are like "republicans" so to say. They deffend the right to have arms for self-defense, want more free-market, respect the police and overall rules. Brazilians are very nice people, add to it the beautiful and good dressed girls and beaches, we had everything to be the best place to live on earth.

The problem is, we were stucked with ONLY left-wing politicians, the 40% always had to vote for the least-bad option. Now, after 20 years, the country is finally waking up, and we have at least some new right-wing pro capitalism options.

It will be hard to change everything after so many years of socialism, but let's hope for the best. Last pool showed Dilma has a 90% government dissaproval. Hope it stays that way until the next election. We hope the left oriented crazyness is finally dying, so this pain we have now, will act like a medicine, we hope.

Fri, 10/02/2015 - 16:58 | 6622626 consider me gone
consider me gone's picture

Best of luck. We're hoping for the same thing here. Only our crash is in slow motion. We will be Brazil before it's over. Or Venezuela.

Fri, 10/02/2015 - 15:35 | 6622229 Zero-Hegemon
Zero-Hegemon's picture

Had me at the clickbait. Lost me at the title.

Fri, 10/02/2015 - 16:43 | 6622561 Able Ape
Fri, 10/02/2015 - 16:49 | 6622588 SantaClaws
SantaClaws's picture

Broken link alert!!

Tyler, I clicked on the picture of the two young hotties, like all modern B.F. Skinner rats did today (https://en.wikipedia.org/wiki/Operant_conditioning_chamber), but nothing happened.

Didn't click on the other pictures.

Fri, 10/02/2015 - 17:14 | 6622701 Manipuflation
Manipuflation's picture

Alright, I actually went back and read the article for some reason.  What do I win for that?

Do NOT follow this link or you will be banned from the site!