Wall Street Traders Run for Cover as Brazilians Take the Streets

Wall Street Traders Run for Cover as Brazilians Take the Streets

By David Biller

9:42 PM BRT
March 17, 2015

(Bloomberg) — Finance Minister Joaquim Levy’s attempt to restore investor confidence in Brazil is being undermined by deepening political turmoil and public dissatisfaction.

Traders pushed up the cost to insure the nation’s debt to an almost six-year high on Monday, one day after more than a million Brazilians took the streets to protest government corruption, higher taxes and President Dilma Rousseff’s handling of the economy. The credit-default swaps have risen faster this year than those for Russia, India and China, the three others that make up the BRIC group of nations.

With the economy on the brink of its deepest recession in a quarter-century, a growing chorus of lawmakers and citizens has come out in opposition of austerity measures that Levy says are needed to keep Brazil from losing its investment grade. O Estado de S. Paulo reported last week he threatened to quit, which rattled traders across all assets and deepened selloffs in Brazil’s debt, equities and currency.

“We’re in a fragile moment,” Joao Junior, a fixed-income trader at ICAP Brasil, said by telephone. The pushback that he’s facing “will generate stress in the market.”

The Finance Ministry’s press office referred Bloomberg News to a March 13 report in Valor PRO where Levy said he and his team have no plans to leave the government.

‘Gaining Confidence’

Since entering office in January, Levy has capped some spending at ministries and raised taxes on items including fuel, credit and cosmetics. He said Monday the belt tightening will rebuild investor faith in Brazil while leading to economic growth.

Credit-default swaps fell 17 basis points his first two weeks in office after rising 89 basis points during Rousseff’s first term.

“The first step toward gaining confidence is getting the public accounts in order,” the University of Chicago-trained economist said.

Rousseff’s approval rating in a Datafolha poll last month fell to the lowest of any president in 15 years as measures advocated by Levy to shrink the deficit contributed to increased unemployment and higher consumer prices.

Lost Job

Latin America’s biggest economy will contract the most since 1990 in 2015 as higher taxes and a weaker currency fan above-target inflation, according to the latest central bank survey of analysts and data from the International Monetary Fund. Brazilians marched in every one of the nation’s 26 states Sunday, with more than a quarter of the protesters in the city of Sao Paulo calling for Rousseff’s impeachment, a separate poll by Datafolha showed.

Vania Dias de Nascimento, 38, says she wanted to join the demonstrations in Brasilia but couldn’t afford the bus fare. She lost her cleaning job in February when her employer said cost increases made it too expensive to keep her on.

“I shouldn’t have voted for Dilma,” said De Nascimento, a mother of two who is still looking for employment. “We thought she was going to govern well, but that’s not what she’s doing.”

Many lawmakers in Congress have tried to block Rousseff’s austerity measures. Senate President Renan Calheiros, a member of the ruling coalition, this month rejected the administration’s provisional decree to unwind payroll tax breaks, forcing it to re-submit the proposal as a bill that will take longer to take effect.

‘Rebuild Bridges’

The administration’s conflict with Congress and the Estado report sparked speculation last week that Levy would leave office, contributing to a plunge in the real, according to Joao Paulo de Gracia Correa, head of currency trading at Correparti Corretora de Cambio, which trades $3.9 billion annually.

Brazil’s currency on March 13 depreciated against the U.S. dollar to the lowest level since 2003.

“The government needs to try to rebuild bridges with Congress to be able to approve the needed measures,” De Gracia Correa said by phone from Curitiba, Brazil. “If Levy sees that he won’t get it, it’s very possible that he will give up.”

‘Political Backdrop’

Levy was scheduled to meet with Fitch Ratings on Wednesday, according to his agenda. He will emphasize Brazil’s commitment to meeting this year’s primary surplus goal, according to a person close to the government’s economic team who isn’t authorized to speak publicly.

Brazil for the first time last year posted a primary deficit, which excludes payments on interest.

Standard & Poor’s last March lowered Brazil’s credit rating to one level above junk, citing what it said were deteriorating fiscal accounts and a slowing economy.

“Levy is making some progress, but against very difficult political backdrop,” Siobhan Morden, head of Latin America fixed income at Jefferies Group LLC, said by phone. “The main problem right now is governability and a weak government. Price performance when you have that main concern makes Brazil vulnerable to market risk.”

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