Brazil’s Fall

choi

Latin America | Brazil’s Fall; Disaster looms for Latin America’s biggest economy. Economist, Jan 2, 2016.
http://www.economist.com/news/le ... conomy-brazils-fall

Quote:

"On December 16th Fitch became the second of the three big credit-rating agencies [after Standard & Poor in August; 'only Moody's has kept the globe's seventh-largest economy at investment grade'] to downgrade Brazil’s debt to junk status. * * * Brazil’s economy is predicted to shrink by 2.5-3% in 2016, not much less than it did in 2015. Even oil-rich, sanction-racked Russia stands to do better. * * * And Ms Rousseff, accused of hiding the size of the budget deficit, faces impeachment proceedings in Congress. * * *

"Brazil’s suffering, like that of other emerging economies, stems partly from the fall in global commodity prices.

"The fiscal [or budget] deficit swelled from 2% of GDP in 2010 to 10% in 2015. * * * At 70% of GDP, public debt is worryingly large for a middle-income country and rising fast.

"A central target [to reform] should be [public] pensions. * * * Brazil’s government pays almost 12% of GDP to [government] pensioners, a bigger share than older, richer Japan.

"Labour laws modelled on those of Mussolini make it expensive for firms to fire even incompetent employees. Brazil has shielded its firms from international competition. That is one reason why, among 41 countries whose performance was measured by the OECD, its manufacturing productivity is the fourth-lowest.

"Most of Brazil’s borrowing is in local currency, which makes default unlikely. Instead, the country may end up inflating away its debts [intentionally or not].

Note:
(a) This is a summary of "an article" in the issue. There is no need to read the article, which is summarized in the next posting.
(b) "Because of high interest rates, the cost of servicing it is a crushing 7% of GDP. The Central Bank cannot easily use monetary policy to fight inflation, currently 10.5%, as higher rates risk destabilising the public finances even more by adding to the interest bill. Brazil therefore has little choice but to raise taxes and cut spending."
(i) Due to dismal credit rating for the nation's sovereign bonds/ government bonds, the nation has to pay more to borrow (because investors are afraid the sovereign bonds may default (as Argentina has done in 2014 and still has not paid). Just look at Greece's borrowing costs for the past several years; it has not defaulted as European Union has, reluctantly, kept lending it money; still the borrowing cost for the nation's public debt remains high.
(ii) "Because of high interest rates, the cost of servicing it is a crushing 7% of GDP. The Central Bank cannot easily use monetary policy to fight inflation, currently 10.5%, as higher rates risk destabilising the public finances even more by adding to the interest bill."
(A) However, this is a separate matter.  The current inflation rate in Brazil is 10.5%, which happened to US around 1980. The Federal Reserve of United States raised interest rate (to excess liquidity (cash) from the market) to combat inflation, and succeeded. See Paul Volcker
https://en.wikipedia.org/wiki/Paul_Volcker
(section 2.1 Chairman of the Federal Reserve)
(B) With high domestic interest rates, the government pays more to borrow from bond buyers, domestic and foreign alike.
(C) At the same time, the high interest rate slows down the economy of a nation, with higher unemployment. So tax revenue decreases, resulting in bigger budget deficit and forcing the government to borrow more.
(D) Another consequence of raising interest rates is that sovereign bond is less attractive, the nation ending up paying more to borrow. See the next title.

(c) Regarding quotation 4.

Social Security: Japan (under the heading "Country Benchmarks"). In Chapter 3 Fiance, of Indermit Gill and Martin Raiser, Golden Growth; Restoring the lustre of European economic model.
World Bank, 2012, at pages 125-129
siteresources.worldbank.org/ECAEXT/Resources/258598-1284061150155/7383639-1323888814015/8319788-1324485944855/13_japan.pdf
("The ratio of Japanese aged 65 and older to the working age population is 35 percent, compared with 25 percent for the EU15 and 20 percent for the United States. * * * Public pension spending in Japan is 10 percent of GDP, nearly 3 percentage points higher than the OECD average. But Japan still spends less than younger countries: for example, the ratios are much higher in France (13 percent), Greece (12 percent), and Germany (11 percent). The government has sought to modulate benefits to address its rising demographic burden, and the structure of the Japanese pension system has been adjusted several times")

choi

Brazil’s crisis | Irredeemable?  A former star of the emerging world faces a lost decade.

Quote:

"Analysts at Barclays, a bank, expect debt to reach 93% of GDP by 2019; among big emerging markets only Ukraine and Hungary are more indebted. The figure may still seem on the safe side compared with 197% in Greece or 246% in Japan. But those are rich countries; Brazil is not. As a proportion of its wealth Brazil’s public debt is higher than that of Japan and nearly twice that of Greece.

"The [Brazil currency] real has fallen 31% since the start of 2015 and the stockmarket is down by 12.4%

"It [a possibility that Brazil, particularly president Rousseff, may muddle through] also assumes that Brazil’s penchant for consensus will hold its people back from social unrest on the sort of scale that topples regimes in other countries. The anti-government protests of 2015 were large, drawing up to a million people in a single day. But they were middle-class affairs which took place on sporadic Sundays, causing Ms Rousseff more annoyance than grief.

Note:
(a) "By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off."

" the first quarter of 2014, when it last saw growth"

View only the first graph (heading "A New Low": Change from a year earlier in quarterly GDP) at
Paulo Trevisani and Jeffrey T Lewis, Brazil GDP Slips for Third-Consecutive Quarter. Wall Street Journal, Dec 3, 2015
http://www.wsj.com/articles/braz ... -quarter-1448970368
(six consecutive quarters of negative growth (since 2Q14, inclusive), the worst being 3Q15 at an annualized rate of -4.5%)

"Source: IBGE" indicates these are official numbers, where IBGE stands for "Instituto Brasileiro de Geografia e Estatística" Brazilian Institute of Geography and Statistics.
(b) "Nor could Mr [Joaquim] Levy easily fill the fiscal hole by raising taxes. Taxes already consume 36% of GDP, up from a quarter in 1991. And the recession has hit tax receipts hard."

Levy was finance minister January to December 2015.

(c) "There is a worry that the [Brazil central] bank may be unable to raise rates further for fear of making public debt unmanageable—what is known as 'fiscal dominance.' * * * What is more, raising rates may have the perverse effect of stoking inflation rather than quenching it; [may have] an increasing risk of default as borrowing costs grow is likely to see investors dumping government bonds, provoking further currency depreciation.  A handful of economists, including Monica de Bolle of the Peterson Institute for International Economics, believe that Brazil is on the verge of fiscal dominance. And once interest rates no longer have a hold on inflation, she says, it can quickly spiral out of control."
(i) What is "fiscal dominance"?
(A) Brazil’s economy | Broken Lever; Are dire public finances hindering the central bank from tackling inflation?  Economist, Oct 31, 2015
("some economists have a more alarming explanation [for the 'fast-rising prices' or inflation]: that Brazil’s budgetary woes are so extreme that they have undermined the central bank’s power to fight inflation—a phenomenon known as fiscal dominance. * * * Fiscal dominance may be no more than a theory, but the political burden that is dragging Brazil down is plain for all to see")
(B) Fiscal dominance may be indeed a theory, because it is not mentioned in economics textbooks. When the term is found in economics papers, there is no vigorous definition or mathematics.
(ii) And why the name?

This Economist article ("Brazil’s crisis | Irredeemable?") alludes to

Monica de Bolle, Brazil Needs to Abandon Inflation Targeting and Yield to Fiscal Dominance. Peterson Institute for International Economics (PIIE; an economics think-tank located at DC), Sept 30, 2015 (blog).
http://blogs.piie.com/realtime/?p=5172

Quote:

"What happens when efforts to combat inflation collide with government deficits so large that they force the central bank to buy up debt [reduce budget deficit, if not debt service/ interest payment], print money, and thereby drive up inflation? Economists describe this as a collision between inflation targeting and fiscal dominance.

"Brazil, in its current crisis of high deficits and high inflation, is suffering from fiscal dominance.

(A) About quotation 1. The "fiscal dominance" means concerns MORE about the reducing of budget deficit (fiscal) over the subduing of inflation (through monetary means, by raising interest rates).
(B) Quotation 2 is the definition of fiscal dominance -- the twin presence of high budget deficit and high inflation.  But there is no quantitative test: how much of each component or the combination.
(C) Taylor rule
https://en.wikipedia.org/wiki/Taylor_rule
(section 2 The Taylor Principle)


(d) Portugal-English dictionary:
* real (adjective masculine and feminine; plural reais; Latin adjective masculine and feminine reālis ‎real): "true, real"
https://en.wiktionary.org/wiki/real