Brazil’s Real Leads Global Drops as Rousseff Rebuffed on Taxes

Brazil’s Real Leads Global Drops as Rousseff Rebuffed on Taxes

By Filipe Pacheco

10:07 AM BRT
March 4, 2015

(Bloomberg) — Brazil’s real led global currency declines as President Dilma Rousseff was rebuffed in the Senate over the unwinding of tax breaks, adding to concern that she will struggle to shore up the budget.

The real slid 1 percent to 2.9607 per U.S. dollar at 9:40 a.m. in Sao Paulo, the weakest level on a closing basis since August 2004. The drop was the biggest among 31 major currencies tracked by Bloomberg.

Brazil’s Senate leader Renan Calheiros said Tuesday the administration’s tax plan had to be presented as legislation and not a provisional decree going into effect immediately and requiring quick approval in Congress. Speculation that a stalled economy and fiscal weakness will lead to a sovereign credit downgrade has pushed the real down 24 percent in the past six months.

“As long as the political uncertainties persist, traders’ reluctance in real longs will remain,” Ipek Ozkardeskaya, a currency strategist at Swissquote Bank AS in Gland, Switzerland, wrote in an e-mailed response to questions. “Markets are craving for stronger fiscal conditions in Brazil, and Rousseff’s team is given little margin of error.”

Finance Minister Joaquim Levy announced last week a reduction of payroll tax breaks that would save the government 5.3 billion reais ($1.8 billion) in 2015 and 12.8 billion reais in 2016. The proposal is one of several measures designed to reduce a budget deficit that almost tripled during Rousseff’s first term.

Swap rates, measuring expectations for changes in Brazil’s borrowing costs, rose 0.14 percentage point to 13.01 percent on the contract maturing in January 2017.

The central bank will increase the target lending rate by a half-percentage point to 12.75 percent later Wednesday, according to the median forecast of economists surveyed by Bloomberg. That level would be the highest since 2009.

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