Debt management in Brazil: evaluation of the real plan and challenges ahead

• Published in: International journal of finance and economics Vol. 7; no. 1; pp. 15 - 35
• Main Authors: Bevilaqua, Afonso S., Garcia, Márcio G.P.
• Format: Journal Article
• Language: English
• Published: Chichester, UK John Wiley & Sons, Ltd 01-01-2002; Wiley Periodicals Inc
• Subjects: Banking industry; Brazil; Cash management; Central banks; Debt management; debt structure; Economic policy; Evolution; Fiscal policy; Foreign exchange rates; GDP; Gross Domestic Product; Inflation; International finance; Macroeconomics; public debt; Public sector; Sovereign debt; Studies; Sustainability; Brazil
• ISSN: 1076-9307; 1099-1158
• DOI: 10.1002/ijfe.172

The Brazilian domestic debt has posed two challenges to policy‐makers: it has grown very fast and its maturity is extremely short. This has prompted fears that a default or a compulsory lengthening scheme would be imposed. Here, we analyse the domestic public debt management experience in Brazil, searching for policy prescriptions for the next few years. After briefly reviewing the recent domestic public debt history, we decompose the large rise in federal bonded debt during 1995–2000, searching for its macroeconomic causes. The main culprits are the extremely high interest payments—which, until 1998, were caused by the weak fiscal stance and the quasi‐fixed exchange‐rate regime; and since 1999, by the impact of the currency depreciation on the dollar‐indexed and the external debt—, and the accumulation of assets of doubtful value, much of which may have to be written off in the future. Simulation exercises of the net debt path for the near future underscore the importance of a tighter fiscal stance to prevent the debt‐GDP ratio from growing further. Given the need to quickly lengthen the debt maturity, our main policy advice is to foster, and rely more on, inflation‐linked bonds. Copyright © 2002 John Wiley & Sons, Ltd.