Brazil Is Already in Economic Depression, Says ex-President of Brazil’s Central Bank

RIO DE JANEIRO, BRAZIL – A former president of the Central Bank and a founding partner of Gávea Investments, Armínio Fraga, sees with concern the public accounts situation in Brazil.

According to him, the country is currently experiencing an economic depression. “In terms of the extent and depth of the recession, yes. I would say this is a depression, although it is not comparable to the Great Depression of the 1930s,” Fraga said in an interview.

The combination of the economic, political and health crises creates a paralyzing picture, according to Fraga. He says that with the advent of the pandemic and its consequences on employment, a way out must be conceived in coordination, as a solution on all fronts, as has been the case around the world.

According to him, however, Brazil is a point off the curve: “What we have here is different: it is several weeks of growth in the number of cases without, yet, a clear sign of reversal, but with much pressure to reopen the economy”.

He says the government must also be alert to its ability to increase spending as a result of the pandemic. “The government cannot settle into thinking that Brazil is Japan or the United States, which can spend without great consequences,” argues the economist, who adds: “Each step of the way the hole is increasing, and now we are nearing a debt of 100 percent of GDP and a growth machine that is completely broken”.

Fraga also fails to hide his concern over the solvency risk of debt, which he says would start with the shortening of bond maturities and thus the average term of debt. If the government fails to effect a permanent fiscal adjustment in this interval, the debt becomes a quasi-currency, with very short maturities and in excess of foreign exchange reserves, which would cause a flight to other assets and currencies, explains the ex-president of the Central Bank. This scenario, according to Fraga, would leave only two “unbearable” options: a very high inflation or a default, in other words, a default in payment to holders of government securities.

The economist believes that even indexing the debt to the exchange rate would not be enough to avoid the script he has outlined. “You can index it to the exchange rate, to inflation or to the SELIC, but in the end there would be no way out without facing the fiscal hole. And deep down there’s another hole: the scarcity of adequate spending in the social area,” Fraga says. He argues that with Brazil’s “extreme” inequalities, there will always be demand for spending in areas such as health, education and social security.

Source: Estadão Conteúdo