How the economic policies implemented in Brazil from 2008 to 2014 led to the financial crisis of 2015

How the economic policies implemented in Brazil from 2008 to

2014 led to the financial crisis of 2015.

Master Thesis Program: Master in International Finance Student: Kelly Sganzerla Student number: 11404809 Thesis Supervisor: Tanju Yorulmazer

ABSTRACT

In this thesis was presented how the economic policies used in a wrong way caused Brazil to enter in the biggest financial crisis in history since 1930. The post-crisis countercyclical policies of 2008 were analyzed, from the end of the Lula Government until the first term of President Dilma, which ended in 2014. In addition, the external factors that contributed to the crisis were presented, mainly based on the price of commodities and also the corruption scandals that led the country to a deep crisis in 2015.

The indicators of possible crisis were observed and how the Brazilian economy responded in these six years with respect to these variables. We conclude that the exacerbated increase in credit with low investment in infrastructure combined with the fall in the international price of commodities were decisive factors for the crisis.

Keywords: Economic Policies, Commodity Prices, Corruption , Brazilian Crisis, Dilma Rousseff Government, 2015 Crisis.

TABLE OF CONTENTS

1. INTRODUCTION ... 4

2. 2008 GLOBAL CRISIS ... 7

2.1 THE SYMPTOMS OF 2008 CRISIS FOR BRAZIL ... 7

2.2 THE GOVERNMENT MEASURES ... 8

3. FIRST YEARS OF DILMA ROUSSEFF GOVERNMENT AND HEADING TO CRISIS ... 11

3.1 LOOSENING MONETARY POLICY AND OTHER MEASURES TO FIGHT INFLATION ... 12

3.2 EXPANSIONARY FISCAL POLICY AND GOVERNMENT DEFICIT ACCOUNTS... 14

3.3 EXCHANGE RATE POLICY AND COMMODITY PRICES ... 18

4. THE CRISIS ... 23

4.1 LEADING INDICATORS OF CRISIS ... 23

4.2 AN ANALYSIS OF THE BRAZILIAN ECONOMY... 25

4.3 CORRUPTION SCANDALS... 37

4.4 FINAL CONSIDERATIONS ... 40

5. CONCLUSION ... 43

1. INTRODUCTION

Starting at the end of 2014, in 2015 Brazil experienced in the biggest financial crisis in history since 1930. The GDP decreased by 3.8% in 2015, remaining in recession in 2016 (-3,6%), which had not happened since the 1930s in the country. According to Lacerda (2016), in order for a country with the poverty level and the demographic profile of Brazil prosper, production must grow at an average pace of at least 2.5% a year for 3 or 4 consecutive years to show signs that the worst of the crisis has passed

Brazil has always suffered for having non stable economic growth over the years, which makes everybody pessimistic and the expectation is that the crisis will only begins to show signs of improvement in 2020.

We can link the crisis of 2015 to a combination of internal and external factors that ended up affecting the economy and leading to inflation, recession and unemployment.

Between the end of 2008 and all of 2009, Brazil seemed to be resisting well to the international financial crisis that started in the real estate sector in the United States. However, the decline in foreign markets coupled with the decline in foreign direct investment (from US$ 44 billions in 2008 to US$ 31 billions in 2009) and the drop in the prices of most important commodities exported from Brazilian (crude oil and soybeans), resulted in a huge fall in industrial production and an increase in unemployment in the production sector.

In the government's attempt to restrain pessimistic predictions about economic indicators, they used Keynesian measures based on the intervention of the state in the economy to achieve full employment. Central banks use various measures to affect the level of production and consumption. For monetary policy, the central bank is assumed to fix the supply of money, so when they change the volume of money, it affects the interest rate. (OKUN, 1967). They can achieve this through lower rediscount rates, the percentage that Central Bank collected from the cash deposits by banks. Another way would be through the repurchase of public securities, putting more money in the economy.

The government's first response was injection of liquidity into the economy, reducing banks' compulsory deposit, extending credit to the banking sector and reducing the SELIC (reference interest rate) from 13% per annum to 8.65% per annum. On the fiscal side, there was a reduction of indirect taxes in some sectors and an increase in the government salary expenses and increase in the values of the

Bolsa-Família1, but with almost no investment in infrastructure or relief in the tax collection of taxpayers. Demand from China which became the main trading partner in 2009, also helped make the global crisis less likely to be felt in Brazil. Exports to China were around 14% of the total export from Brazil in 2009, mainly with products such as soybeans and cellulose.

On the political front, after ruling the country for 8 years (2002-2010), and still with a huge popularity after all those years, mainly for shielding Brazil from the effects of the global crisis, President Lula engages in the election of his successor, Dilma Rousseff who was elected in October 2010 with 56% of the valid votes.

In line with the former president, fiscal and monetary policies continued to expand during the following years. The Government expanded several social programs, reduced the interest rate on loans of machines, equipment and industrial construction, through BNDES2 _{to 4.5% per year (recall that the SELIC interest rate at}

the time was 7.40% per year). The subsidies started in 2008 continued to grow through the Dilma Government. An important fact was the reduction in IPI (tax on industrialized products) for cars, an investment twice that of public transport. BNDES provided privileges for the automotive industry, from 2008 to 2013, where the disbursements to the sector were R$ 32 billion (US$ 10 billion) while urban mobility projects took R$ 9 billion (US$ 3 billion).

Another important fact was the reduction in the electric energy tariff of 18% for the domestic consumer and up to 32% for the industries, agriculture and commerce in 2013, which is a direct way to try to stimulate production and consumption in the country.

While the government took the measures explained above, problems began to appear in the largest Brazilian government company, Petrobrás. The company whose majority shareholder is the Government of Brazil, and in January 2011 was the third largest energy company in the world, authorized through its directors suspicious investments and purchases of companies in other countries. The biggest case was the purchase of Pasadena Refinery in the US in 2006, for an amount considered much higher than the target. That time, President Dilma was a cabinet minister in the Lula Government and presided over the Petrobrás board of directors, voting in favor of the purchase.

The car wash operation3, launched in March 2014 to investigate money deviations from Petrobrás, began to arrest people connected with the government and to provoke anti-corruption protests throughout the country. Dilma, seeking the re-election continued to increase expenses and cook the government accounts.

On the other hand, external factors such as the fall in crude oil prices from US$ 105 in July 2014 to US$ 47 in January 2015 and soybeans from US$ 546 for a bushel in May 2014 to US$ 367 in January 2015, directly affected the Brazilian trade balance, because exports declined from US$ 23 billion in July 2014 to US$ 12 billion in February 2015, a drop of 52%, taking into account that they are two of the largest Brazilian export products, helping to make the crisis even greater.

By the end of 2014, the country already showed that it had an infrastructure bottleneck that monetary and fiscal policy would not be able to turn around. It became evident that the country would grow only 0.1% against 2.7% of the previous year and the public accounts of the Dilma's Government were deteriorating.

In this thesis, we will analyze how the use of erroneous economic policies caused to Brazil economic recession, unemployment and loss of purchasing power in a period of six years. The monetary and fiscal policies of Dilma Government will be analyze, from the countercyclical policies initiated by the Lula Government until the time of the "New Economic Matrix", when in 2013 Brazil already showing growth below expectations. It will also be shown how the scandals of corruption and the political crisis caused to the President Dilma the lose in power of governability.

In addition, external factors such as fall in commodity prices and the mistaken exchange rate policy in a high inflation period in Brazil will further reduce economic growth which was already low,

For this we will use measures from the literature to predict crises, such as credit growth, international reserves, current account balance and internal debt to see how Brazil stood compared to those measures.

Finally, we will conclude that the exacerbated credit growth, the increase of the internal debt of the government allied with the fall in commodity prices and the political crisis were clear signs of an imminent economic crisis.

3 _{Operation that investigates crimes of active and passive corruption, fraudulent management, money} laundering, criminal organization, obstruction of justice, fraudulent exchange operation and receipt of undue advantage.

2. 2008 GLOBAL CRISIS

In this chapter we will analyze how the Brazilian economy behaved in the first two years after the crisis of 2008. Since the first months of crisis that caused the fall in international demand and the difficulties of brazilian companies to obtain external financing until the countercyclical policies adopted by the Lula government that made Brazil - in a short term - do not feel a lot the effects of the crisis.

In 2008, Brazil was going through a period of economic growth. The country came from a period of five years growth and stability with inflation under control. The real gain of Brazilians had a trajectory of growth since 2003, mainly due to the fall of inflation and significant increases in the minimum wage. It was one of the best years in the country's history in terms of job creation.

In the first half of 2008, GDP grew 6% in relation to the same period in 2007. The appreciation of commodities in the international market with a policy of diversification of markets, contributed to the increase in Brazilian exports. From 2003 to 2008, sales of Brazilian products abroad grew more than 100%, boosting the industry in the country. However throughout 2008, the country's consumption was growing substantially and started to show overheating. Fearing increases in inflation, as consumption was moving faster rate than production, the Central Bank decided to raise the reference interest rate for the first time since 2005.

The year 2008 was also a record for the Federal Government cash, boosted by the good performance of the companies, which had high profits and therefore paid more taxes. Net debt to GDP fell about 4 points in 2008 to 38.8% of GDP. Economic Liberalism, an idea advocated by Alan Greespan, still president of the Fed at this time, influenced international governments and Brazil until then had adopted an economic policy of nonintervention of state in the economy.

2.1 THE SYMPTOMS OF 2008 CRISIS FOR BRAZIL

In the end of 2008, the labor market began to show the first signs of the crisis. More than 500,000 people lost their jobs only in December, the worst result since 1999. The situation continued to worsen until April 2009, with unemployment reaching almost 9.0% of the population. With scarce and more expensive credit, families began to feel the crisis and consumption fell for the first time in six years.

markets and Brazilian companies faced serious difficulties in finding financing abroad. In addition, with the crisis came the reduction of international demand, further damaging Brazilian exports. With a volume of about 20 billion dollars in July 2008, exports fell to 9 billion dollars in January and February of 2009.

In the last quarter of 2009, GDP shrank 7.4% in relation to the same period of 2008. With the economy in decline, Brazil registered a technical recession in 2009, with a growth of 0.3% in that year.

With the worsening of the financial crisis at the end of 2008, the Central Bank faced a dilemma between inflation and recession. It was necessary the government make a chose to keep the basic interest rate at 13.75%, contrary to the major world economies, which caused huge criticism from the part of National Confederation of Industries, arguing that the government should lower the interest for the country to continue producing.

The emergence of a crisis in the financial center of the United States put in check the liberal thought until then in force. The major countries of the world began to defend a greater participation of the State in the economy, which also occurred in Brazil. The Brazilian Minister at the time, Guido Mantega, said that the government should be a facilitator of some sectors of the economy to be able to grow again.

2.2 THE GOVERNMENT MEASURES

There is a consensus that the adoption of a countercyclical fiscal and monetary policy through increase in expenses and decrease in taxes as a reaction to international financial crises (such as 2008) has its limits imposed primarily by its impact on long-term growth, the risk of fiscal sustainability in countries with high public debt and deficits. It is relevant to question under what conditions the short-term benefits of an expansionary economic policy in combating the economic slowdown will contribute to the long-term growth of the economy (Gadelha, 2011). Countercyclical policies work when government can increase expenditures in a sustainable way and conduct monetary policies that do not fuel inflation. To sustainably increase in aggregate demand, Governments need to ensure that their actions do not affect the credibility and solvency of the country in the long run, so they should be reviewed from time to time, taking into account government data, such as surplus and inflation targets.

The domestic interest rate movement in 2008 was a statement that the inflation target system was at the top of the Government's economic priorities.

Raising the interest rate at the time of international crisis showed the government's concern to control domestic demand at that time. While trying to contain inflation with tight monetary policy, they were trying to stimulate the economy through increased expenditure and fiscal policy.

On the other hand, after the collapse of Lehman Brothers, the reaction of the BNDES, a bank focused mainly on providing long-term financing for industry and infrastructure works, was to accelerate disbursements and approval of projects, to counterbalance the shortage of credit for companies in the market, showing where the government was acting countercyclically. As a result, disbursements jumped from R$ 90 billion in 2008 to R$ 136 billion in 2009 (in reais). In addition, other public banks such as Banco do Brasil and Caixa Economica Federal, the most significant in rural and real estate loans, increased by 16% and 24%, respectively, from 2008 to 2009.

In fiscal policy, the federal government responded to the crisis based on four main points: Expansion of PAC4 _{investments, "Minha Casa Minha Vida" Program}

(subsidy for the acquisition of own houses for families with incomes of up to 500 dollars per month), maintenance and expansion of social programs, such as "Bolsa Familia", and reduction of taxes.

Transfers linked to health and education programs increased their weight in total intergovernmental transfers by 4.0%. The main determinant of the transfers expansion as a whole were those directed to families as a strategy of the federal government to promote redistribution of income through social spending, through the policy of expansion of "Bolsa Família" and, above all, the valorization of the minimum wage.

This redistributive effect of the expansion policies of the minimum wage and of transference to low-income families has the direct implication of strengthening demand. This is because it is observed that in this population layer, the pattern of consumption is intensive with a small increase of salary because there is a low propensity to save what generates a stimulus in the domestic demand, resulting in greater production and jobs. Therefore, the transfer of income through pensions and other social benefits was one of the factors that contributed the most to cushion the impacts of the crisis.

Investments in infrastructure led to the resumption of investments. What is striking is the magnitude of the contributions made to Petrobras this year, from 37.9

million reais in 2008 to 51.1 million in 2009, mainly based on the expectations related to the discoveries of pre-salt5_.

Overall, the crisis affected the tax revenue in two ways. The first and most obvious, the crisis implied a decrease in production and the generation of income and jobs, contributing directly to the fall in the collection of taxes on products, profits and wages. The second was linked to the government's initiative to reduce tax rates on industrialized products from various sectors and personal income tax, which affected the tax revenue.

In the short run, Brazil did not suffer as much from the external crisis, as it experienced a growth phase between 2003 and 2010 led by demand, initially by exports (rising commodity prices produced in the region created a favorable external scenario) and subsequently with domestic demand. The continued real increase in the minimum wage, the expansion of public credit, and a fiscal policy that combined a significant increase in income transfers to families, a recovery in public investment and tax relief contributed to brazilians did not feel the great consequences of the global crisis.

In 2010, the Workers Party (PT) needed a successor. After eight years6 _of

Lula as President, Dilma Rousseff, then Chief Minister of Lula Government, was made a Party Candidate in June of 2010. On October 31, Dilma was elected president, obtaining a total of 56.05% of the valid votes.

5_{Pre-salt layer is an area of about 800 kilometers on the Brazilian coast, discovered by Petrobras in 2007,} with oil reserves that are under a deep layer of salt.

6 _{In Brazil, presidents are elected for a four-year mandate and can be reelected for another four years, totaling} a maximum of eight years of government.

3. FIRST YEARS OF DILMA ROUSSEFF GOVERNMENT AND HEADING TO CRISIS

After demonstrating the end of the Lula government and his measures in the face of the 2008 crisis, in this chapter we will analyze the economic policies - monetary, fiscal and exchange rate - of the Dilma government.

From the beginning of her administration, with an expansionary economic policies, until 2013 when monetary policy began its turning point with the interest rate increase while fiscal policy remained expansionary and the real lost value against dollar, nullifying the effects on demand and inflation of an increase in the interest rate. It will also analyze the behavior in commodity prices and how the fall in the price of the three main Brazilian export products helped to deepen the crisis.

Dilma was elected without a government plan, only promising to maintain the previous government model, since in the last 3 years Brazil had managed to remain stable despite the external crisis, which made many Brazilians think that Dilma would be in the shadow of Lula from the beginning to the end of her mandate. It was widely speculated that she would stay under the influence of the ex president and the party, just being guided to end the mandate and in four years Lula be cast as a candidate again.

Even with so many doubts about what was to come, since Dilma was elected president in her first political candidacy, with no experience in any other elective office, there were no bumps in the financial market. It was assumed that it would be another four years of non-formal autonomy of the Central Bank, floating exchange rate, investment in infrastructure and macroeconomic measures contained.

The first year of Dilma Government was complex: at the international level, with the continuing global economic crisis, with intensified effects on the Eurozone and at the domestic level, the concerns about inflation and then with the slowdown of the economy, due to both, the external and domestic factors, and the policies of stabilization of prices.

The Dilma Government began by executing monetary and fiscal tightening, to fight the inflationary outbreak inherited from the Lula Government. The president-elect was aiming at growth, but at a pace that did not generate price pressure and thus increase inflation, and increase investments through cheaper public or private financing. In the medium term, the plan was to lower net government debt and interest rates in order to promote a strong increase in private investment.

3.1 LOOSENING MONETARY POLICY AND OTHER MEASURES TO FIGHT INFLATION

Dilma maintained the expansion of public banks, believing that this expansion would be important for investment and increased supply. In 2011 the Brazilian Central Bank believed in a growth potential of close to 4%, after a growth of 7.5% in 2010, but what was observed was the country with difficulties to grow, with a growth forecast of less than 2%. Brazilian economy began to decelerate: lower growth rates, deceleration of private investment and household consumption - especially debt-backed -, competition difficulties faced by industry, growing external deficit and the stabilization of inflation at the maximum level of the government's goal put in check the capacity of sustaining growth of the Brazilian economy.

This forced for the government to start relaxing monetary policy, since it already had a restrictive fiscal policy. From then on, the government began to put into practice one of the president's most promised objectives of a permanent reduction of the interest rate in the country. As we see in Figure 1, by the end of 2011 the Central Bank started reducing the basic interest rate, which, in the following year reached the lowest historical percentage by Brazilian standards: 7.14% per year. This policy, however, is reversed as of March 2013 and maintains the restrictive bias until the end of the first Dilma Government. By 2014 the nominal SELIC rate had risen to 11.65%.

Figure 1: Brazilian Interest Rate - 2008 to 2015

Source: Brazilian Central Bank

This started to put pressure on prices causing inflation. The Government, not satisfied with low growth and high inflation rate adopted a new monetary policy, even

more expansive. The Central Bank continued to lower the interest rate, even with signs of loosening in fiscal policy and public banks accelerated credit.

In the first half of 2012, the Dilma Government used public banks with a commercial portfolio to force, through the competition mechanism, the fall in interest rates and spreads practiced by private banks. BNDES continued to play a fundamental role in the implementation of the expansionary credit policy. In addition to extending the term of investment programs until the end of 2013, the Long-Term Interest Rate -

In 2013, the Government initiated an interventionist policy, foreseen in the New Economic Matrix. Direct interventions in the price system as an auxiliary instrument of inflation control are seen by economic agents as unsustainable and stimulated rather than contain the excess demand in the short term, having as counterpart the worsening of expectations in the medium and long term.

The Government began to control prices to try to contain inflation, which was visible in gas, tax relief and electric tariffs. The efforts to lower regulated prices such as electric energy, which had the tariff reduced 18% for the domestic consumer and up to 32% for the industries, agriculture and commerce, to try to make inflation give a truce did not take effect.

This happened, at first, because despite the slowdown in activity, unemployment continued to fall, pushing the cost of labor. Wages continued to rise above productivity, but without increasing revenues to dilute fixed costs and corporate margins fell sharply. Companies were forced to control costs, leading to a fall in formal job creation.

To try to curb inflation in April 2013, the Central Bank began the process of raising interest rates. This showed a lack of a consistent approach in the management of the economy, with the impression that the government was just trying to solve the day-to-day emergencies, without an economic project defined anymore. The fact is that even with the increase of the basic interest rate inflation did not yield and it was not possible keep the effective inflation in line with the target within the expected time horizon as we can see in Figure 2.

Figure 2: Brazilian Inflation - 2008 to 2015

Source: IBGE

One of the reasons why it was not possible to experience a reduction in inflation through an increase in the basic interest rate, making the contractionary monetary policy inefficient was inertial inflation - responsible for Brazilian hyperinflation in the 1980s - that is the linkage of current prices to inflation through indexation mechanisms, such as contracts, rents and school fees (Gremaud, Vasconcelos & Júnior 2004). Inertial inflation coupled with future inflation expectations has a huge impact on short-term inflation.

In the end, the Dilma government attempted to pursue a less orthodox monetary policy, which was not sustained, mainly by the emergence of strong inflationary pressures, forcing the Central Bank to adopt a more restrictive policy.

3.2 EXPANSIONARY FISCAL POLICY AND GOVERNMENT DEFICIT ACCOUNTS During the campaign, Dilma was committed with the continuity of the social policy initiated in the Lula Government and for that, the Government reduced the primary surplus targets of the public sector from 3.3% of GDP in 2011 to 3.1% in 2012 to 2014. However, since the previous government, the targets were lower than that provided for in the Budget Guidelines Law7_{, because they contemplated the}

possibility of abatement of some investment expenditures of the federal government. Between 2009 and 2010, for example, investments in the largest state-owned

7 _{The law purpose is to guide the elaboration of the fiscal and investment budgets of the Government, the} public companies and municipalities. It understands the goals and priorities of public administration, including capital expenditures for the subsequent financial year.

company, Petrobras, were excluded from the target of the government's primary result. In the Dilma Government, the abatement of some investments included in the PAC were authorized, making the fiscal policy even more expansionary.

Federal government consumption continued to grow every year. During the Dilma government, the largest expenditures on social programs were in basic health - "More Medical Programme" - and spending on scholarships and aid to individuals (outside the "Bolsa Família").

With the expansion of public spending and the increase in public indebtedness, as a stimulus to economic activity a growing demand for Brazilian "new middle class" was seen in Brazil, with access to the goods and services market subsidized by cheap credit for durable consumer goods, purchase of real estate and cheap financing in public universities.

Regarding tax policy, indirect taxes on the consumption of goods and services were the ones that increased their participation in the Dilma Government. In this way, the relative weight of taxes is higher for the lower income families, who are more likely to consume. The lack of integration between the tax system and the policies of income transfer and provision of public services was an aggravating factor in the attempt to redistribute income. The high tax burden on the low-income population coupled with the restriction of the supply of public services reduces or even nullifies the effectiveness of social spending to reduce inequality.

This distortion of the national tax system helps to aggravate and perpetuate the mechanisms of social inequality by acting against income transfer policies. Taxes on income and property, which could be the subject of redistributive policies aimed at reducing injustices and inequities in the collection system, remained practically the same (Gentil and Hermann 2015).

It is important to highlight the government's tax exemptions that were intended to increase consumption, such as increasing the minimum value for income tax exemption, raising the disposable income of the low and middle income population and the zero rate of some taxes on products of staple food. The reduction of the tax on industrialized products for machinery and equipment in some sectors, such as the automotive and home appliance, aiming at reducing the cost of productive capital and increasing the supply of demand that continued to increase.

Well-implemented public investment, with transfers at a necessary level, a low proportion of financial expenditures, and a greater weight in infrastructure investment expenditures, would have the potential to stimulate economic growth

through the crowding-in effect8 on private investment. To achieve this in addition to capturing public expenditures, it is important to signal that spending policies also encompass companies, reducing the tax burden. On the other hand, a low tax burden may restrict the Government's ability to implement social policies by limiting the level of spending possible. In short, there is a limit to such an expansionist policy of public spending, which must be coordinated with monetary policy.

Despite the tax burden, investments in the private sector did not happen in an expected manner, since despite the Government's attempts to promote growth, there were many adverse influences, such as the expectations of external demand initiated in the 2008 crisis to continue contracting, loss of competitiveness of domestic production, deceleration of household consumption and instabilities in the exchange rate and interest rates.

The fiscal policy of the first Dilma Government sought to expand public spending but not enough to avoid a slowdown in consumption. Public investment in infrastructure such as the PAC was also not enough to make the country resume healthy economic growth.

The policy focused on the expansion of social assistance and social security transfers, induced demand to grow but without supply growing as well, due to the lack of investments in infrastructure, which led to an increase in inflation. The tax exemptions were necessary but not sufficient.

At the beginning of 2013 the Government had a problem to solve: on the one hand there was a concern to contain inflation and fiscal control, but on the other hand there was a need to recover economic growth of only 1% in 2012, taking into account that social policy (the flagship of the Party campaign) was greatly hampered by insufficient investment in important areas of public service and social infrastructure such as hospitals and schools.

The main bottleneck in Brazil was and still is the infrastructure. Investments in energy, ports, highways and airports are very necessary for economic growth to become stable year after year. What draws attention is that even observing an expansionary fiscal policy, the government investment rate, faced with the country's huge deficit in productive infrastructure, was very low, with an average of only 1% of GDP in the four years of government. On the other hand, the biggest expense of the Dilma government was the social assistence. Expenditure on social security and social assistance reached 10.0% of GDP in 2014.

8

Between 2011 and 2014 public investment assumed an irregular behavior, with retraction and expansion in alternate years, resulting in a drop in the average growth rate. Figure 3 shows that in 2014 GDP was 0.10%, with the economy entering into a technical recession for the first time since 2009, when Brazil most felt the effects of the global crisis.

Figure 3: Brazilian GDP - 2008 to 2015

Source: ADVFN.com

The reasons for not meeting the Primary Surplus targets in the Dilma Government depend on increased public spending and reduced collection due to declining production. The countercyclical measures initiated since the Lula Government, due to the financial crisis of 2008, had the cost of a strong fiscal resignation. When Dilma took office, she expanded the expenditure with income transfer and subsidies, in an attempt to promote economic growth through increased public spending, with a highly interventionist action in the economy. However, this strategy of intervention by the State as a way to promote the growth of economic activity did not work, as it did not increase the investment rate and, consequently, did not have the expected effect on economic activity.

The worsening of the nominal deficit and failure to meet the primary outcome goal already leads to a decrease in the credibility of the public accounts. In addition, we still had "fiscal pedals" (late payments and transfers) and subsidies placed outside the primary surplus target through capitalization and loans at out-of-market rates, in particular for BNDES.

3.3 EXCHANGE RATE POLICY AND COMMODITY PRICES

In addition to the inadequacy of the Dilma Government's fiscal policy to deal with the downward trend in the domestic economy, the expansionary effects of public spending in this period were also limited by the behavior of imports. In the period of 2011 to 2014, imports grew, on average, at rates higher than those of GDP growth, and a large part of the Government's expansionary fiscal effort, Rousseff, fueled external demand, reducing its net effect on the domestic economy.

Since 1999, Brazil had abandoned the exchange rate anchor (one of the pillars of the Real Plan) and adopted a floating exchange rate regime. And even with the exchange rate fluctuations of countless economic crises such as the dot.com bubble in 2000, the crisis in Argentina in 2001, the attacks of September 11 and the global crisis of 2008, there were no reductions in Brazilian exports, as well as the receipt of foreign direct investments, with average net inflows of 3.0% of GDP between 1999 and 2009.

The proceeds of the floating exchange rate, with the inflation targeting and primary surplus regime, were crucial for S&P to raise the BB+ sovereign rating to BBB- in April 2008, causing the country to have an investment grade.

In addition, Brazil was experiencing a commodity export super-cycle, especially for China, and with rising prices of the main Brazilian exports products (such as soybeans, iron ore and crude oil) since mid-2009, contributed positively to maintaining the real appreciated. Exports to China, increased more than 500% between 2005 and 2011 (Castro, 2016). However, as a negative effect, the exchange appreciation caused the loss of competitiveness of domestic products in the international market and the domestic market. Part due to the weakening of the dollar in the market, due to recent crisis, the price in June 2011 was the lowest revalued in 12 years.

In this way, the Government with its New Economic Matrix starting in 2013 was aimed at depreciating the exchange rate through interventions by the Central Bank in the market, aiming at correcting the distortions of an exchange that was supposed to be excessively appreciated, and which ended up being an obstacle to one of the economic goals of the government that was the increase in exports.

Exchange rate depreciation was driven by almost daily interventions by the Central Bank, with the sale of foreign exchange swaps in the market, taking the dollar out of circulation, which eventually raised the dollar from R$ 1.56 in 2011 to R$ 2.40 in August 2013, as we see in Figure 4.

Figure 4: Exchange rate - Real/Dollar - 2008 to 2009

Source: Investing.com

But the effect of exchange rate depreciation on inflation can be crucial. They increase the cost of producing domestic products that have, in their manufacture, components that are imported and that do not have close substitutes. In this way, it ends up causing the increase in final prices to compensate for the higher prices of inputs. In addition, with the more expensive imported competitors, local producers tend to increase their prices. Therefore, in economies such as Brazil, exchange rate devaluation may compromise economic stability due to inflationary pressures.

Even with the government's attempt to improve exports through the devaluation of the exchange, from the end of 2013 the country begins to face the problem of the fall in the price of the main export commodities.

The "super-cycle" of commodities, with China's full incorporation into world trade, resulted in a period of sustained growth in Latin America between 2002 and 2012, but it was clear from 2013 that commodity prices were already coming in its summit and that we would not see a price escalation as high as in the decade that had passed.

Whether it is through the clash between supply and demand or speculation, Latin America continues to maintain its historical dependence on primary products. In Brazil, 54% of the exported products are commodities, a percentage still very high when compared to the developed countries.

In 2012, soybean was responsible for 6.5% of total Brazilian exports, and in September of that year had one of the higher historical price, reaching US$ 615 per bushel. Two years later, in September 2014, the bushel was costing $ 368. A drop of about 41%, as shown in Figure 5.

Figure 5: Soybean Price - 2008 to 2015

Source: Index Mundi

In Figure 6 we see that crude oil is responsible for 8.6% of the total value of exports. After the huge fall in 2009 due to the international crisis, the barrel recovered its market value being quoted at US$ 117 in March 2012. In July 2014 began to decline again and in November 2014 was being traded at US$ 76 a barrel. Figure 6: Crude Oil Price - 2008 to 2015

The Brazilian most exported product is iron ore, which accounts for 16.4% of Brazilian exports in 2012. As we see in Figure 7, in January 2011, the price per dry metric ton was US$ 179 and despite a sharp drop in 2012, in January 2013 was worth US$ 150 per metric ton dry. However, from the middle of 2013 the price declined in a concise manner, reaching the price of US$ 74 in October 2014, a drop of 51%.

Figure 7: Iron Ore Price - 2008 to 2015

Source: Index Mundi

In this context, it is inevitable that a fall in the price of raw materials will have a clear impact on the balance of payments of countries such as Brazil, which is considered a pillar of economic sustainability.

Another important point to note was the gross inflow of foreign direct investment in the country, which fell from US$ 69 billion in 2011 to US$ 49 billion in 2013. This was due to a lack of confidence in the Brazilian economy, which already showed weak signs of growth in 2012, falling below expectations and countercyclical policies that were no longer having an effect on the economy.

The slowdown in economic growth and falling commodity prices weighed on foreign direct investment in Brazil. Of particular concern is the sharp decline in investment in industrial projects, which play an important role in improving productivity in developing countries such as Brazil. FDI can be an important source of technological innovation, expansion of productive capacity, new business and administrative techniques that help boost the economic growth of the recipient country.

Figure 8: Foreign Direct Investments - 2008 to 2015

Source: Central Bank

Targeting direct investments in export oriented sectors shows that FDI can have a significant effect on the country's GDP. Thus, it was important to have public policies that would redirect and stimulate the entry of FDI into priority sectors of the economy, especially those related to industry and technology sectors, but it was already apparent that the government's public accounts were beginning to deteriorate and that the foreign investor was worried about the direction of the Brazilian economy.

In September 2015, the Standard and Poor's agency, was the first one that withdrew the investment grade of Brazil, putting the country again in the speculative category, from BBB- to BB+, claiming as main reasons, the fiscal deterioration associated with the effects of the corruption investigations of state-owned Petrobras by "Car Wash Operation".

4. THE CRISIS

After analyzing the behavior of the brazilian economy in Dilma and Lula government in the six years before the crisis, in this chapter we will demonstrate through the literature what are the main crisis indicators.

After that, we will make more detailed analysis of how Brazil behaved in relation to these economic variables in the period before the crisis. We will also talk about the corruption scandals and the political crisis that began in the middle of 2013.

4.1 LEADING INDICATORS OF CRISIS

In recent years, many economists have been monitoring alerts of financial crises focused on the Signal Estimation method. The Signals Approach, used by Kaminsk and Reinhart (1996), is a model where a group of economic variables are monitored. If one of these variables deviates from its considered normal level, pre-established on the basis of its historical series, this is taken as a warning signal of a possible crisis. The purpose of these models was to develop a methodology that could predict critical points in business cycles.

According to Kaminsky and Reinhart (1996), if the analysis is about a balance of payments crisis, a maximum gap between the signal and the crisis would be two years. Thus, any signal issued within the twenty-four-month period preceding a balance of payments crisis is considered a good sign. On the other hand, a signal issued that is not followed by a balance of payments crisis in the twenty-four-month period is considered as a false alarm or noise. When the analysis starts for crises in the financial system, the maximum interval defined would be twelve months between the signal and the crisis. However, when we analyze the relationship between exchange rate and vulnerability, for example, where the changes are daily, these deadlines can be very long, since in a few days those indicators can generate signs of a crisis.

Many economists judge three measures as serious risk factors for an eventual crisis. The first is the current account balance: a current account deficit of 5% or more of GDP corresponds to a high vulnerability for the country.

The last one is the proportion of external debt to international reserves needs to be balanced: a disparity in this account can lead to a crisis of confidence and an increase in country risk. Reserves are considered as a precautionary cushion against the risks of financial openness and their function includes crisis prevention and crisis management, because reserves might be used to smooth economic adjustment processes when there is external shocks.

Although the classic theory says that debt holders are international creditors, hence the importance of having a good international reserve account, Rogoff and Reinhart (2009) show that domestic debt has been very important as well. Although a high level of public sector debt is not directly correlated with a higher probability of a financial crisis, it tends to exacerbate the negative effects of deleveraging the post-crisis financial sector. That is, the ability to put new countercyclical fiscal policies do not exist, reducing the ability of the government to reverse a crisis.

For Krugman (1979), the period leading up to a currency crisis is characterized by a gradual loss in international reserves and also a fast growth in domestic credit that would be the result of the need for public sector financing and fiscal imbalance. In this way, the financing of the public sector, by increasing the debt-to-GDP ratio, could serve as an indicator of a possible crisis.

Also, there are some macroeconomic variables of major importance to avaliate the probability of an economic crisis, like the Ibovespa9 index, measured in points, represents the current value, in currencies, of a theoretical stock portfolio and its variation. It is the most important indicator of the average performance of Brazilian stock market prices, and for this reason, a drop in this index may represent negative expectations on the part of investors and vice versa. The index ends up serving as a measure of the credibility that the country has in the international financial market.

Another relevant variable is the country risk that allows us to assess the ability of a country to become insolvent through a point calculation made from a basket of securities traded on the market. Each point means 0.01% of premium above the yield of US debt papers. If a country receives 250 points, for example, it means that the foreign investor charges to assume the Brazilian risk, a premium of 2.5% of income above that is paid by a similar American bond. Country risk shows itself as a measure of the country's credibility in the international financial market as well.

9 _{Ibovespa is the São Paulo Stock Exchange Index, and it is an indicator of the performance of shares traded} on Bovespa. This portfolio consists of shares, which together represent 80% of the volume traded on the spot, and which were traded in at least 80% of the trading sessions in the 12 months prior to the formation of the portfolio.

One more important factor to consider is the public accounts. A deficit government does not have the conditions to invest in infrastructure, education and health projects. The country needs to be based on a serious fiscal control, defining the main national interests, where expenditures cannot be greater than tax revenues. Lastly, the variables as the rate of inflation and the basic interest rate - SELIC, are important measures. Inflation in times of economic growth is normal and tends to increase, however in a country like Brazil that has a history of inertial inflation it is important that the inflation is on targeting. The basic interest rate represents the rate charged by investors for transactions in federal government securities, the higher the discount charged, the greater the investor's distrust of the economy's directions and the government's ability to honor its debts.

Table 1: Summary of leading crisis indicators

4.2 AN ANALYSIS OF THE BRAZILIAN ECONOMY

What we can observe is that even with the real valued up to 2012, exports performed well, mainly due to high commodity prices and the consolidation of China as the largest Brazilian importer, at a time when it was growing at levels of 10.0% per year and they needed high volumes of raw material.

Figure 9: Current account balance in % of GDP (monthly)

Source: Advfn.com

From 2013, with the drastic drop in the price of soybeans, oil and iron, Brazil's main exports, the balance of current Brazilian transactions showed many months of negative balance. Historically the months of January are the most likely to have negative balance of current account, however in January 2014, it happened the worst deficit since 2008, of around four billion dollars. This represented a deficit of 2.0% in relation to GDP, as we see in Figure 9.

In developing countries, it is normal that this percentage is negative at some point, but is a sign of vulnerability if it is permanent. As stated above, a current account deficit of 5.0% or more of GDP corresponds to a high vulnerability for the country. In this case we did not see such a significant increase in the deficit in relation to GDP, as growth in 2013 was only 2.7% and in 2014 we experienced a technical recession, with growth of only 0.10%. In this way, we can not characterize this measure as a warning of potential crisis, but it was notable to realize that the fact that Brazil, in the last years, did not invest in technology and industrial production, exposed the huge dependence on commodities and collaborated to the economic growth plummeted from 2012. It is important to note that from September 2014 to February 2015, that is, for six consecutive months, there were current account deficits. -3,00% -2,00% -1,00% 0,00% 1,00% 2,00% 3,00% 4,00% 5,00%

Figure 10: Current account balance in % of GDP

(quarter)

Source: Advfn.com

January is usually a month of deficit in Brazil due to the lack of agricultural products. When we put in a quarterly chart, the current account balance in % of GDP and added a trend line, as we did in Figure 10, we noticed that although it did not reach values lower than 5.0%, the trajectory has been a drop in this percentage since the third quarter of 2011.

This shows that as the world economy grows at a slower rate in the next few years, it will be necessary for Brazilian industries to reinvent themselves in order to remain competitive in the international market, otherwise, if they continue to be a raw material exporter, the chances of low economic growth for the next few years are great as commodity prices are far from returning to the level they were five years ago.

The level of foreign reserves is also an important macroeconomic variable, since it shows the ability of the Brazilian Government to honor international debts.

There is no consensus or rule for all countries on the ideal level of international reserves, several indicators can be used as a measure to prescribe an adequate level for reserves in convertible currencies. For Frankel and Saravelos (2010), the relation between imports and reserves and percentage of GDP has been ones of the most used.

Many economists believe that a country's optimal level of foreign exchange reserves must be sufficient to finance imports for a minimum of three months in the case of, for example, a sudden stop of exports.

Figure 11: Equivalent of reserves in months of imports

Source: Central Bank

As we can see in Figure 11, Brazil had throughout the term of President Dilma a considerable amount of reserves in relation to months of importation, and there were no signs of potential crisis from this point of analysis.

When we analyze the proportion of international reserves, in 2010 and 2011 R/ED ratio (ratio between international reserves and external debt) was more than 100%, this was due to the fact that the country receives large remittances from foreign investors after the main rating agencies rise the country from speculative to investment grade. In 2012 and 2013, even with low interest rates for Brazilian standards, the dollar continued to be undervalued in the country, which triggered the exchange swap sales from the Government in order to raise the exchange rate to help Brazilian exports that went through a complicated period due to the fall of the dollar and as already mentioned of the commodities price.

In Table 2, we can see that until 2011 it can be said that Brazil had a liquid position, since reserves were enough to cover the international debt. Starting in 2012, external debt begins to grow, leaping from US$ 310 billion in 2011 to almost US$ 400 billion in 2012 and growing in a cohesive manner in 2013 and 2014, which has caused the debt to jump from 113% in 2011 to 79% in 2014, which can be interpreted as a warning sign.

Table 2: Proportion of International Reserves for External Debt (in US$ billions)

Source: Indexmundi.com and Central Bank

This increase is due to the fact that even with interest rates well below the country's historical record and the government's incentive for growth, the takeover of funds abroad was still the cheapest option, encouraging Brazilian investors to take resources off with much lower rates. In the United States, for example, by the end of 2015, FED interest rate was below 1% per annum, precisely to stimulate growth after the 2008 crisis. This made large Brazilian companies that have a bargain for securing loans abroad, increase its external debt, since in the account of the difference between the Brazilian cost and the international cost plus the probability of currency devaluation, it was still worth this second option.

Finally, it is important to note that although international reserves remain at a good level and growing until 2012, in 2013 there was a decline and together with the increase in foreign debt, in 2014 the R/ED ratio remained at a percentage below historical.

Another important variable to be analyzed is the substantial credit increase credit in Brazil in this period. Those who popularized the rise in domestic credit as a risk variable were Sachs, Tornell and Velasco (1996), as it shows the vulnerability of the country's banking system. If there is a substantial increase in credit it is possible that it is associated with a fall in loan patterns.

Demirguç-Kunt and Detragiache (1998, 2005) suggest that a rapid expansion of credit can lead to a banking crisis, and the vulnerability to sudden capital outflows is a robust predictor of crises.

The increase in credit can have a positive effect on the economy if it is not operating at full employment. It can boost consumption, causing more people to demand services and products, causing companies to produce more, need to hire more employees, dominating unemployment and consequently making GDP grow in a sustainable manner, without generating pressure on inflation, since it is not at full employment level. In theory, the increase of credit has many advantages for an

Scott Davis and others (2014) suggest that the marginal effect of credit growth depends on the current account. For a country with a balanced current account (without large deficits) an increase of 1.0% on credit, increases the probability of a crisis by 0.1%. For countries with current accounts with deficits of more than 10.0%, the increase about 1.0% in credit, raises the probability of crisis to 0.5%.

Table 3: Increase of credit - 2008 to 2014

Source: Central Bank

As we see in Table 3, total credit increased by about 150% between 2008 and 2014. This was largely due to the fall in the basic interest rate, which led many companies to make loans with lower interest rates, with the government's idea of investing in production, strengthening growth. But this was mostly due to an increase of demand than of supply. Firstly due to paycheck credit which consisted of getting a loan that was directly discounted on the paycheck. In this way, the risks of the banks and operators of default credit were close to zero. What we observed then was an expressive increase in the number of people's indebtedness, stimulated by the reductions of some taxes in some products such as cars and household appliances, and with interest rates never seen in the country history.

In the case of credit to physical people, the largest increases are due to the directed resources, that is, those that have a government subsidy. The real estate credit liberations (one of President Dilma's main government plans through "Minha casa minha vida Programme") jumped from R$ 131 billion in 2011 in the first year of the Government to R$ 432 billion in 2014, an increase of 230%.

It is important to remember the large participation that BNDES had in this credit increase. The main function of the BNDES is to engage in operations of different sizes and segments that can contribute to the economic and social development of the country. As already mentioned, it is a bank linked to the ministry of development and is directly linked to the government's economic policies.

Although BNDES has credit operations for individuals, its main focus is on companies.

We can see a significant increase in the amount of BNDES releases from 2008 to 2014. In the accumulated of the 6 years the growth was 205%. In 2013, to take a loan between 5 and 10 years, the average annual rate was 4.5% per year, at a time when SELIC was at 7.5% a year. That is, a government-subsidized loan had lower rates than the basic interest rate defined by the government itself. This sparked a rush on the part of the companies, even with projects of expansion of industries and increase of production still badly defined, for they did not lose the chance to take loans at such a low cost.

However, as financing was aimed for building new plants and expanding industries (the release of money was made directly into the supplier's account of the borrower through the delivery of raw materials and products) the return of this practice would not be seen in a short term, and the idea of achieving rapid growth with the coming elections would not be possible.

Finally, what we can observe is that despite the government's efforts to try to increase supply for sustainable growth and with controlled inflation, this did not happen. Firstly, was to increase credit subsidized with public money, which generates an increase in public debt. Secondly, because in a historical population such as Brazil, where the lower classes have no habit of saving money, a decrease in the interest rate, with an increase in real wages, can trigger an increase in the rate of inflation substantially, since investments to increase production and supply do not happen at the same moment of time.

In addition, the lack of investments in infrastructure, such as ports and highways (main means of Brazilian distribution), for example, show that the country is not prepared to withstand the increase in demand, preventing the production from being disposed efficiently. In this way, companies respond to the increase in demand through rising prices, pushing inflation and making the GDP decrease the power of growth.

For the variable of the public accounts, Reinhart, Rogoff and Savastano (2003), said that safe debt levels can be quite heterogeneous, especially in developing economies. Official measures of public debt are typically a significant understatement of vulnerability. Historically, periods of high government debt led to marked increases in debt restructurings, Reinhart and Rogoff (2013).

high public debt often has a more immediate and painful consequence for economic performance.

It is important to say that there is a distinction between external and internal divisions for the signs of crisis. For Reinhart and Rogoff (2013), the domestic debt issued in domestic currency offers a greater range of partial defaults than the external debt. For example, to reduce debts in the national currency, the Government can use solutions of financial repression and inflation while the options for foreign currency debt are smaller.

After 2011 the public debt is growing at an accelerated pace and even more relevant if we observe that in general it was already quite high, representing more than 50% of GDP. This deterioration in public accounts was one of the main factors of Brazil's downgrade to speculative rating.

As we have seen previously, the Brazilian external debt has increased considerably in the six years preceding the crisis. However, domestic debt grew at a much higher rate, from R$ 2.0 trillion in 2013 to R$ 2.29 trillion in 2014, about 8.0%. This is because in the government's impetus to continue with the expansionist policies, continued to spend more than it collected and increasing the interest rate to contain inflation caused the debt interest to jump between 2012 and 2014. In 2015 at the height of the crisis the government's internal debt rose 21.0% to R$ 2.8 trillion.

Although Reinhart and Rogoff (2013) look at the adverse effects of external debt, internal debt is also worrisome when it comes to an economy where public spending is the primary means of meeting government goals.

When we observe the increase of the internal public debt in relation to the GDP, the values call the attention. In 2008, when the countercyclical policies began with increases in government spending, domestic debt rose from 36.9% of GDP to 63.4% in 2014.

Table 4: Government Debt - 2008 to 2015

Source: Central Bank and Indexmundi.com

The numbers are not even worse because since 2009 rebates are allowed in the primary surplus target for investments in the "Investment Acceleration Program", known as PAC. In 2013 and 2014 the tax exemptions were also deducted from the

fiscal target. In this way, the surplus goal ended up being very restrictive and difficult to interpret by the government's auditors. Under the Budget Guidelines Law, in 2013 the initial primary surplus target was 3.1% of GDP and the final result was 1.9%. Since 2009, some types of accounting maneuvers, for example, financial transactions between public entities, have been made with the purpose of generating primary revenue. For instance, when the State sold to BNDES the rights to receive dividends from Eletrobras10 _{and managed to increase its primary revenue by more}

than R$ 3.0 billion.

In 2012, an operation yielded the coffers R$ 8.8 billion. It involved the purchase of Petrobras shares that were invested in an Investment Tax Fund, where the resources of the Sovereign Fund, by BNDES paid with public bonds that were monetized. In another case, BNDES anticipated dividend to the union.

In addition, we can also mention the postponing of expenses through a specific balance sheet account called "account remnants" that from 2013 to 2014 was R$ 218 billion.

What was seen from 2013 onwards was an increasing attempt by the government to make up public accounts. This was because, as already mentioned, the increase in credit generated an increase in public debt, but the government did not want to slow the pace of social programs, precisely because the 2014 elections were approaching. However, with revenues already much lower than expenses (in particular with public officials), the government was no longer able to make economic policies work in full. SELIC had already returned to the level of 11.0% per annum, inflation rates were above target, and GDP remained below expectations.

By early 2014 the government had already lost transparency in its accounts, and it was a matter of time for the maneuvers to come to the public, showing the real state of the public accounts. In October 2014, under various controversies and scandals of corruption and "fiscal pedals", Dilma was re-elected, closing that year with a fiscal deficit of 32.5 billion reais.

Figure 12: Evaluation of Public Account - 2008 to 2015

Source: Globo.com

Another important measure to analyze is the stock exchange. Bovespa is today the largest stock exchange in Latin America and one of the most important in the world. Its market value in 2015 was about US$ 480 billion. Ibovespa, benchmark index of São Paulo stock exchange, shows that since 2010 the Brazilian stock exchange has not been able to recover its breath.

Figure 13: Ibovespa - São Paulo Stock Exchange Index - 2008 to 2015

Source: Bovespa.com

As we see in Figure 13, after the crisis of 2002 in the country, there was a period of great growth, going from 11,000 points to 63,000 in 2007. This period was considered a golden year for investors of the stock market in Brazil. In 2009 there was a big recovery due to the countercyclical measures taken by the government after the crisis of 2008, which is very remarkable in the chart with a growth of 82%.

In the meantime from then the economy begins to have growing problems. Neither the fact that the country was raised to investment grade rating in that period changed the tendency of the stock market to fall. After reaching 68,000 points in 2009, Ibovespa closed with 51,000 points in 2013, similar to that seen in 2006.

Two important factors for the stock market crash were the devalued dollar and the low interest benchmark rates. Foreign Portfolio Investments (FPI) are around 35.0% of total capital in the Brazilian stock exchange and they are mostly speculative, and it is notable that in a period of uncertainty there is an escape from them. With the real overvalued it was not feasible the investment in Brazilian stock market, while in other countries of Latin America, such as Mexico, dollar had more value.

From 2013, when interest rates begin to rise and the dollar appreciates to the level of R$/US$ 2.4, the problem becomes another. The scandals of corruption and the "car wash operation " are gaining momentum and investigations are beginning to draw important politicians for the Government from its position. In addition, problems begin to appear in public accounts and uncertainty about the Brazilian fiscal scenario becomes an additional risk for investors.

Figure 14: Participation of FPI in Bovespa - 2008 to 2015

Source: Bovespa.com

Sovereign CDS have become important risk management tools and the protection costs provided are often used as indicators of credit risk. The higher is the CDS, the greater is the risk of the country giving a default, which means that it is more expensive to buy insurance for that country's debt.

During this period the country risk, which as already mentioned is a calculation that allows us to access the ability of a country to become insolvent,

where each point means 0.01% of premium above the yield of US debt papers, remained constant in about 200 points with small variations.

By the end of 2014 we observed an increase in risk, reaching 300 points in the middle of 2015 due to corruption scandals and problems with the public accounts. In any case, the country risk remained low when compared to the last great Brazilian crisis of 2002, when the risk reached 2,400 points.

Figure 15: Brazil CDS Price - Jun 2010 to Dec 2016

Source: Assetmacro.com