Casas Bahia collapse exposes Brazil's structural fiscal rot spreading fast

The collapse of Casas Bahia dominates Brazil's economic landscape this Wednesday with an intensity that goes well beyond the failure of a single retailer: it acts as a magnifying glass on all of the country's structural fractures — elevated real interest rates, chronic household indebtedness, restricted credit, and a fiscal deterioration that markets themselves are beginning to price in with mounting anxiety.

Grupo Casas Bahia's judicial recovery filing, submitted on Sunday with declared debt of R$17.3 billion, had yet to be granted by São Paulo's 2nd Court of Bankruptcies and Judicial Recoveries as of Wednesday. Judge Taina Maria de Oliveira has appointed an expert to assess the regularity of the documents and the retailer's operational condition before ruling. In the meantime, the company is seeking R$1 billion in debtor-in-possession financing, with expected participation from Bradesco and Banco do Brasil — its two largest financial creditors — to bridge the coming months. The strategy is to use judicial recovery as a bridge to 2027, when the company hopes to release roughly R$1 billion of the approximately R$2 billion held in judicial deposits and to renegotiate its tax liabilities, which consume between R$1.5 billion and R$2 billion per year.

The collapse exposes a chain of impacts extending across suppliers, workers, and the financial system. The Regional Labor Court of the 10th Region provisionally suspended the collective dismissals carried out between August 13 and 17, which had eliminated nearly 2,000 jobs, while São Paulo's courts required suppliers to maintain deliveries already in transit and prohibited the cutoff of essential services. Multilaser disclosed to the market an estimated loss of R$20 million in receivables from the retailer. On the labor front, the retail workers' union is pressing for the early payment of severance. The human dimension of the process is underscored by another revealing data point: the company has laid off nearly 12,000 workers since 2023, while consumer complaints at Procon-SP grew 65% in the first seven months of this year versus the same period in 2025. Two seals of the corporate drama also emerge: companies linked to Michael Klein, heir to the founding family, appear on the retailer's own creditor list for more than R$63.7 million — which would give him voting rights in the recovery process.

Casas Bahia is not an isolated case. According to a survey by Folha de S.Paulo, judicial recoveries have risen 66% amid high interest rates and restricted credit, also driven by agribusiness. Finance Minister Dario Durigan himself declared on Wednesday that the long-term rates paid by the National Treasury are "very high" and "unacceptable." The statement carries relevant political weight: Durigan is expected to meet in the coming days, in Rio de Janeiro, with former Finance Ministers Arminio Fraga and Pedro Malan — two icons of the economic orthodoxy of the FHC administration — amid discussions about the direction of a potential fourth Lula term. The meeting, however protocol, signals the need to build bridges with financial markets at a moment when fiscal credibility is the scarcest commodity in the marketplace.

J.P. Morgan captured this risk precisely in a report published this week. The U.S. bank views the real as remaining fragile and projects the dollar at R$5.50 in an electoral scenario unfavorable to fiscal consolidation — warning that virtually no electoral risk premium is embedded in current prices. On the previous day, the dollar had closed down 0.85% at R$5.177, benefiting from the U.S. Treasury's announcement that it will double its buybacks of long-term securities, a decision that eased Treasury yields and temporarily lifted emerging market assets. The Ibovespa ended the session up 0.90% at 167,830 points, breaking an eleven-session losing streak — a recovery that, however, does not yet constitute a technical reversal, according to analysts.

The deterioration of public debt directly feeds this pessimism. In June, 51.2% of the federal domestic marketable debt was tied to the Selic, up from around 40% at the end of 2022, while fixed-rate bonds retreated from 28% to 21.8% of the total. Investors are avoiding locking in long rates given the risk of quickly falling behind — behavior that, in turn, pressures the exchange rate and perpetuates the vicious cycle. Ipea confirmed that states and municipalities also expanded spending above inflation in the first half, with transfers from parliamentary earmarks injecting R$21.5 billion during the electoral period, further stoking pressure on domestic demand.

On the consumer credit front, data on private payroll-deducted loans are alarming: more than 40% of operations are concentrated among workers earning up to two minimum wages, and delinquency has already reached 8.6%. Large companies and banks listed on the Ibovespa, according to a survey based on second-quarter earnings calls, foresee slower growth and even recession in 2027. CEOs of utilities such as CPFL Energia and Copasa reported that household indebtedness is already squeezing payment of basic water and electricity bills — with the response strategy simply being to intensify service cutoffs.

On the trade front, Development Minister Márcio Elias Rosa confirmed that application of the Reciprocity Law against Trump's U.S. tariffs is unlikely to be concluded before December, signaling that the process is long-term and that the government rejects the narrative that negotiations are tied to the electoral calendar. The stance is politically delicate: the campaign of Flávio Bolsonaro, Lula's main challenger, has already signaled it intends to revisit the tax reform and reduce the VAT — without, for now, specifying which sectors would benefit.

In the energy sector, the shutdown of GNA II, Brazil's largest thermoelectric plant, since August 10 — due to a steam turbine circuit breaker failure that damaged the step-up transformer — warrants monitoring. The plant, owned by a joint venture between BP, Siemens and SPIC Brasil at the Açu Complex in Rio de Janeiro, still has no defined date for returning to operation.

The coming days will focus attention on whether Casas Bahia's judicial recovery is granted — a decision that will set the pace for the entire restructuring — on the Fed minutes and their implications for the exchange rate and future rates, and on the CVM's ruling on Banco Master, scheduled for September 8. Durigan's meeting with Fraga and Malan will also be closely watched as a thermometer of the political mood around the fiscal agenda for the next government cycle.

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