Brazilian President Dilma Rousseff got a rare bit of respite on Tuesday when a Supreme Court justice granted an injunction that delays a lower house vote which could have paved the way for impeachment proceedings.
House speaker Eduardo Cunha has remained defiant, vowing to exercise his “constitutional prerogative” to review impeachment requests.
Of course Cunha has his own set of problems. Allegations of corruption tied to the discovery of Swiss bank accounts have led to calls for his resignation and that, in turn, has Rousseff’s “aides fear[ing] the speaker could try to speed up the impeachment process.” As Reuters notes, if Cunha accepts even one of three impeachment petitions he has on his desk, “a parliamentary commission with representatives of all parties would analyze it and put it to a lower house vote.”
It is essentially a race against time to see if the house ethics committee will force his resignation before he can secure the lower house support to force a Senate impeachment trial.
For her part, Rousseff has accused the opposition of “coup-mongering” following last week’s ruling by the TCU that she cooked the fiscal books.
Meanwhile, as the intractable political stalemate keeps investors on edge regarding whether the government will be stable enough to enact the reforms needed to plug the budget gap, the economy continues to crumble.
We got a look at retail sales for August today and the picture was not pretty. Core retail sales fell by a larger-than-expected 0.9% month on month and July was revised lower to -1.6%. Broad retail sales fell 2.0% auto sales crashed 5.2%. Annually, core fell by 6.9% broad by 9.6% yoy. Here’s Goldman with the takeaway:
The near-term outlook for private consumption and retail sales remains negative owing to the significant deceleration of credit flows from both private and public banks, high levels of household indebtedness, declining job creation and real wage growth, higher interest rates, higher taxes (including via inflation), higher utility and transportation tariffs, heightened economic and political uncertainty and very depressed (record low) consumer confidence.
So pretty much everything that could possibly go wrong is going wrong.
And speaking of "high levels of household indebtedness and declining job creation", Bloomberg is out with a look at how the Brazilian dream of a middle class life - complete with homeownership, a car, and of course a high level of debt - has turned into a nightmare on the back of the deteriorating labor market. Here's more:
In the smog-filled, run-down industrial hubs that ring the southern end of Sao Paulo, Brazil’s next big crisis is taking root.
The labor market, long the country’s lone economic bright spot as growth stagnated, is suddenly deteriorating rapidly, driving unemployment all the way up to 7.6 percent from a record-low 4.3 percent at the end of 2014. Nowhere are the layoffs that are fueling that surge more acute than here, in this gritty complex of steel, auto and auto-parts factories built decades ago by the likes of Ford Motor Co. and Volkswagen AG. Sao Paulo is now losing almost 20,000 jobs each and every month, the state’s industrial federation estimates.
Talk privately with Brazil’s most senior bankers and nearly all of them will point to unemployment as a crucial concern. For starters, it’s underpinning the national dissatisfaction that is fanning calls for the impeachment of President Dilma Rousseff and creating policy paralysis in the capital city of Brasilia. More importantly, in a country that has based its growth model in recent years on a credit-fueled boom in consumer spending, it threatens to both deepen the recession -- already the worst since 1990 -- and leave millions of Brazilians scrambling to repay their loans.
This is the situation that Rossini Santos finds himself in.
A 43-year-old steel worker, Santos had loaded up on debt to finance his new middle-class lifestyle. First, it was an $80,000 mortgage back in 2009 to buy a little, one-story home near the factory he worked at. Then, in early 2014, it was a $17,000 loan to purchase a Chevrolet Prizm. Just months later, though, trouble began to brew when his employer, a maker of castings for auto parts, filed for bankruptcy. The company kept operating but was limping along, and in August, Santos was fired with dozens of other workers. He’s now collecting 1,380 reais ($360) in unemployment insurance a month, just one-third of his steel worker’s salary.
“And now I have a mortgage and a car loan,” he said. “And with no wage, I have to tighten my belt.”
In a week-long series of informal conversations with Sao Paulo bankers, unemployment came up time and again as they laid out the reasons that the recession and financial crisis could intensify. They’re worried that the increase in the jobless rate has just begun; that it’s eroding consumer demand, leaving once-crowded shopping malls empty; and that, ultimately, it could drive up loan defaults.
Over the past decade, Latin America’s largest economy underwent a spectacular credit boom that helped pull some 40 million Brazilians into the middle class. Total loans in the banking sector climbed five-fold over that time to 3.1 trillion reais. Family household indebtedness, as a percent of annual income, jumped to 46 percent from 20 percent. Borrowing costs are rising now -- the benchmark rate’s up to 14.25 percent -- as policy makers try to curb inflation, and loan delinquencies are starting to inch up too. In August, they accounted for 3.1 percent of all loans, the most in two years.
In other words, Brazilian households are massively levered heading into what on some metrics looks like a depression. Copom can't cut to boost the economy because the miserable performance of the BRL threatens inflation targets and confidence has been shaken immeasurably by a political crisis where the two main combatants (Rousseff and Cunha) are both charged with corruption.
As you can see, this is just about the worst situation imaginable at every level (political, economic, and with souring loans, financial as well). The world had better hope this isn't a precursor to what's about to befall EMs across the board, although if global growth and trade continue on their current trajectory, it's difficult to see a way out.