Brazil’s fiscal framework already on the rocks

Media reports that Brazil’s government is already seeking to water down the latest fiscal rule (which has been in place for less than a year) reinforces the point we made when the rule was first unveiled that the Lula administration would be unable to hit the fiscal targets. With the public debt-to-GDP ratio set to rise, it’s hard to see credit spreads in Brazil remaining at their current very narrow level. Fiscal slippage also provides another reason to think the central bank will soon slow the pace of monetary easing.