Expansionary fiscal contraction: for Bráulio Borges, Brazil starts from a favorable position
Economist from 4intelligence and FGV Ibre argues that a credible adjustment would bring down interest rates and that the 10-point spread could fall with a coherent fiscal signal.
BY THE X-TRADER NEWS NEWSROOM · REPORTING FROM ESTADÃO · 2 MIN
The term sounds contradictory at first glance: cutting spending to boost the economy. According to Estadão, Bráulio Borges, from 4intelligence and FGV Ibre, assesses that Brazil has a favorable starting point to apply the so-called expansionist fiscal contraction.
The logic is this: a credible fiscal adjustment would stimulate the economy precisely because it would lower interest rates and improve confidence. From the perspective of fiscal responsibility, the reasoning shifts the focus from the size of the cut to the credibility of the trajectory of the accounts.
To support the thesis, Estadão cites experiences from Denmark and Ireland in the 1980s as a reference for the debate.
The thermometer chosen by Borges is the spread between the interest rates on 10-year Brazilian bonds and those on the US Treasury with the same maturity. Today, according to the report, this difference is around 10 percentage points.
The most sensitive point of the analysis is the signaling. Also according to Estadão, if the government indicates a coherent fiscal policy, the spread could fall substantially. The effect therefore depends less on an isolated announcement of adjustment and more on the perception that the accounts will be taken seriously over time.
For those who follow the stock market, Nasdaq, interest rates and the dollar, the topic is not abstract. Long-term interest rates and exchange rates affect the cost of capital, risk appetite and asset pricing in general, which is why the fiscal debate enters the radar of those who invest.
What changes for the investor
If the fiscal signal is confirmed, the scenario described by Borges points to a reduction in the spread in relation to American bonds, with less pressured interest rates. This is the channel that the thesis highlights. The Estadão report, however, does not provide price projections or recommendations, and everything depends on government signals that are yet to come. It is worth monitoring the conduct of accounts, the evolution of the spread and the reaction of future interest rates before drawing any conclusions.
Automatically translated from Portuguese.
