Brazil's Currency Plunges Again, As Decision To Uphold Spending Vetoes Fails To Shore Up Confidence

The beleaguered BRL - which one might have expected to get some respite from the fact that Brazilian lawmakers upheld 26 of President Dilma Rousseff's 32 vetoes on some $32 billion in expenditures - is plunging anew, puntuating the largest five day drop in four years and hitting fresh record lows agains the dollar...

...while CDS blows out (again) and is now at near record wides...

...and cue to emergency swap auctions to stop the bleeding...


Congress, which looked set to delay a vote on the vetoes, decided to go ahead (presumably in light of the FX turmoil that has the central bank operating in "crisis mode") and after a marathon session, Rousseff came away largely victorious. 

But renewed pressure on the BRL suggests the country is far from out of the woods. Here's WSJ with more

Congress postponed the vote on Ms. Rousseff vetoes for salary raises for judicial system workers and regarding pension adjustments. Combined, those adjustments would generate additional spending worth 47 billion reais through 2019, according to government estimates.


The congress didn’t set an exact date to hold a new round of votes on those vetoes.


On Tuesday, Brazilian Senate President Renan Calheiros said he favored postponing the vote to make sure the government had enough support to block the new spending.


But later in the day several lawmakers argued that it was necessary to vote on the vetoes Tuesday, as originally scheduled, to calm markets after the Brazilian real hit its weakest level against the dollar since its launch in 1994.


“This is an important decision…we need to resolve this situation in the congress once and for all. Especially considering today´s economy, Congress needs to give an answer” said Sen. Delcidio do Amaral, the government leader in the Senate.

Here's a bit more from Bloomberg:

  • Congress upheld 26 out of 32 Rousseff’s vetoes that require analysis; remaining 6 will be discussed in another session still to be scheduled
    • Among vetoes sustained was one that prevents people from receiving higher pension payouts at a younger age, which finance ministry said could increase govt spending by ~BRL135b until 2035
    • Two significant vetoes still pending: wage increase of judiciary workers and new formula to adjust pension benefits; together both may increase spending by ~BRL47b in 4 yrs
  • Apart from clear fiscal impact, govt’s victory shows improved political articulation, which may lead investors to see increased odds of fiscal package announced earlier this month passing in Congress
  • Impeachment bets may also be reduced, as opposition’s defeat shows it may be very difficult to get 2/3 of votes in both houses of Congress
    • In order to override presidential vetoes, opposition needs to gather simple majority of lawmakers from both Congress Houses, significantly less than required for Rousseff’s impeachment
  • Another signal of improved negotiation capacity may be seen from Folha reporting that PMDB will nominate 5 members for ministry posts, which may increase govt’s support in Congress
    • Yday, Folha reported that Rousseff hasn’t discussed ministry reform with allies

While Goldman has the following rather downbeat take on August bank lending (data out this morning):

Overall, freely allocated credit and overall lending by private banks have clearly been moderating since late 2013: a reflection of rising macroeconomic and unemployment/credit risk that is dampening both the supply of, and demand for, credit. On the supply side, private banks have turned significantly more conservative and selective in the origination of new credit, and we expect credit standards to remain exigent and selective, given the deteriorating outlook for growth and the labor market in 2015-16. In the meantime, lending rates in non-earmarked credit to both corporates and individuals are rising and are now up +480bp and +1,200bp, respectively, from a year ago. On the demand side, the ongoing severe contraction in investment and negative outlook for growth in 2015-16 has cooled off credit demand by corporates. Finally, the already relatively high levels of household indebtedness, the accelerating labor market deterioration, and rising interest rates are reducing credit demand by households for, among other things, the purchase of durable goods.

And although we hate to say "we told you so," recall what we predicted just moments after China moved to a new FX regime last month: