Opinion: Brazil’s Un-Real Currency

Opinion, by Michael Royster

RIO DE JANEIRO, BRAZIL – Around 22 years ago, writing for another Rio publication and using his real name (no pun intended), the Curmudgeon correctly predicted that there would be yet another maxi-devaluation of the currency, and that the new currency would be called the “real”.

And so it happened. Brazil got real (pun intended) and got off the addictive not-very-merry-go-round called “monetary correction” which perpetuated rampant inflation while keeping it reined in.

The real in its initial phase was actually worth more than US$1, to the astonishment of almost everyone. Prices trebled and inflation came, but stayed (mostly) in low double digits and the Real became a more-or-less stable currency, like those of Singapore and Malaysia.

Notwithstanding a minor hiccough in late 1999, when the dollar went from R$1.20 to R$2.10 in a week, runaway inflation did not come back, because the FHC government was able to control the situation. FHC was re-elected in 1998, and at that time there were calls for his impeachment, made by the very same PT which now says impeachment is a coup d’état.

Upon the election of Lula in 2002, the dollar reached R$3.999 because investors thought he was a socialist like Fidel, Chavez and Kirchner; investors were proven wrong when he appointed Henrique Meirelles as Finance Minister, and, more importantly, supported the austerity program Brazil needed.

The dollar kept on declining in value until everything went wrong in 2014, culminating in the re-election of Dilma as President after she successfully (and mendaciously) argued in her campaign that austerity was not needed.

Now that the dollar has crossed the psychological barrier of R$4 the question on everyone’s mind is…what is it going to do now? Some are predicting R$5 or even R$6, but are short on naming specific factors that would drive the dollar even higher. The Curmudgeon, however, will take a run through some of these hypotheses.

First and most likely in the short term: Joaquim Levy resigns as Finance Minister because he can’t convince his boss or Congress to cut expenses. Second, Dilma herself resigns because she realizes she can’t convince anyone that she’s competent.

Third, Dilma and Congress refuse to cut expenses, and they refuse to increase taxes, and everything stays pretty much the way it’s been, meaning both unemployment and inflation head inexorably for ten percent. Fourth, Moody’s and/or Fitch join Standard & Poor and downgrade Brazil to speculative status.

Let us now enter more speculative territory. Fifth, the TSE throws out the results of the 2014 Presidential election because based on dirty money, calling for new elections in ninety days. Sixth, Congress impeaches Dilma. Seventh, Lula, Cunha and Renan are indicted by Lava-Jato.

When you think about it, any combination of the above might well push the real even lower. That would not necessarily be a disaster for Brazil, but when the price of bread doubles (and it will) people will feel it and begin to get very angry. The June/July 2013 riots could come back with a vengeance.

The Curmudgeon lives in hope but still writes dismal Smidgens.