Fiscal fears slam Brazil's real, boost rates to levels last seen in May

BRASILIA (Reuters) - Brazil’s currency fell sharply and market-based interest rates and spreads spiked higher on Thursday, after a Senate vote stoked investor fears that the government’s fiscal position is deteriorating rapidly.

The Senate late on Wednesday overturned a presidential veto blocking higher spending on civil servants’ salaries, a move that could increase public expenditure by billions of reais and which Economy Minister Paulo Guedes deemed a “crime” against the people.

The lower house will cast its vote later on Thursday.

The government has also indicated it will extend emergency payments to the poor, although at a lower rate than the current 600 reais a month. This will also put pressure on the budget.

“Unlike advanced economies, Brazil is not likely to be able to chart such a course without putting its currency under serious pressure,” said Oliver Jones at Capital Economics.

“The recent slump in the real is a reminder that the political and fiscal risks ... which we flagged up back in May have not gone away,” he said.

The real sank more than 2% at one point on Thursday to a three-month low of 5.6725 per dollar, getting closer to the record low near 6.00 per dollar struck in May. It was last at 5.61 per dollar.

Even though the economy is showing signs of recovering from the depths of the coronavirus crisis, the real has lost almost 7% this month and almost 30% this year.

Similarly, January 2027 interest rate futures on Thursday rose above 700 basis points for the first time since May, up around 100 basis points so far this month.

The spread between January 2021 and January 2027 rate futures, a measure of investor sentiment on Brazil’s fiscal path, widened sharply to around 515 basis points. That’s the widest since May, up 40 basis points in the last couple of days, and almost 100 basis points this month.

Graphic : Brazil 2021-2027 rate spread -

Rate curves have steepened significantly in recent weeks, but central bank officials appear in no rush to bring down longer-term borrowing costs.

Some analysts pointed out that compared to the first months of 2020, 2018 and especially 2016 when Brazil was last in recession and fiscal risks were acute, market rates are significantly lower. So is the benchmark Selic rate, now a record low 2%, they add.

Graphic: Brazil 2027 rate futures -

Reporting by Jamie McGeever; Editing by Cynthia Osterman