Brazil's debt accelerates to five-year high as markets bet on political change.

The dollar's slide to R$5.17 on Wednesday — its lowest level in months — captures with precision the contradictory mood of Brazilian markets: assets are celebrating the prospect of political change while fiscal fundamentals continue to deteriorate at a pace not seen since the pandemic.

The Ibovespa closed September up 5.03%, handily outperforming the CDI, which returned 1.08% over the same period. Year-to-date, equities are up 15.65% — an impressive showing given the macro backdrop. The real appreciated 0.1% in September, ending the month at R$5.174. The immediate catalyst was twofold: softer-than-expected U.S. inflation data, which eased pressure on Treasuries, and growing market conviction that the first round of the presidential election — scheduled for October 5 — will signal a change of power. It is a bet that the next administration will deliver the fiscal adjustment the current one has systematically refused to undertake.

And the fiscal problem is, by far, the most disturbing data point of the week. The Central Bank reported that Brazil's gross debt reached 82.9% of GDP in August — the highest level in five years — accelerating by 4.2 percentage points in the first eight months of the year, the sharpest pace since 2020, when the pandemic justified extraordinary spending. The 12-month nominal deficit hit R$1.264 trillion, equivalent to 9.48% of GDP, resulting from the combination of a primary deficit of 0.62% of GDP and interest expenses of 8.86% of GDP. Global gross debt, according to the IIF, reached US$365 trillion, or 311% of world GDP — though the institute stresses it is more concerned about advanced economies than emerging ones. In Brazil's case, the domestic worry is already enough.

That picture makes the government's conduct in the weeks leading up to the vote all the more disconcerting. The Planning Ministry released R$1.97 billion in frozen budget funds, with the Cities Ministry as the main beneficiary. The government expanded credit limits for states and municipalities, announced debt renegotiation for individual micro-entrepreneurs, promised a new INSS benefit for mothers of atypical children and caregivers, and President Lula raised the Bolsa Família payment. An FGV study shows that 4.6 million program beneficiaries entered the formal labor market between January 2023 and July 2026 — a real data point the government uses politically, but one that does not erase the tension between social spending and the debt trajectory.

No candidate has offered a convincing solution. The issue of super-salaries in the civil service appears in nearly every government platform, but without specifics. Lula is silent on the matter. Economists such as Solange Srour argue that bringing inflation to the 3% target is the structural path to lower rates, but this requires fiscal-monetary policy coordination that Brazil has failed to sustain.

Layered onto this scenario is a new source of financial risk. The CMN published Resolution 5,343, which prohibits FIDCs from acquiring credit rights arising from lawsuits that have not reached a final ruling — the so-called pre-precatórios. The measure, which takes effect on October 13, caught Faria Lima off guard and triggered a rare mobilization: ABVCAP, ANFIDC, and the Associação Brasileira de Special Situations took requests for a postponement to the Central Bank, the CVM, the AGU, and the Finance Ministry. The context is the Banco Master scandal — where messages extracted by the Federal Police from the cellphone of former banker Daniel Vorcaro show that the then-president of the Central Bank, Roberto Campos Neto, invited him to a meeting at his residence in Porto Feliz while still heading the monetary authority. The meeting was called off, but the revelation reignites the debate over the boundary between supervision and proximity to the regulated sector, at a moment when a CGU audit found that 93.3% of Master's payroll-deductible loan contracts were executed before the INSS beneficiaries signed. Federal precatório issuance grew 36% between 2022 and 2026 relative to the previous five-year period, representing an additional R$20 billion per year, according to the IFI — and Justice Gilmar Mendes warned of a R$24 billion risk to the SUS stemming from lawsuits filed by hospitals.

In the credit market, spreads on infrastructure debentures reached their highest level since 2024, with the median of papers tracked by Anbima at 0.74 percentage point above equivalent NTN-Bs. Defaults by Raízen and GPA over the course of the year have driven retail investors away, and infrastructure issuance has fallen to its lowest level since January 2019. Luís Stuhlberger's Verde Asset disclosed that it has bought hedges against a potential capital control regime — a risk it rates as low, but not negligible, should the next government try to force interest rates lower by decree rather than by fundamentals. Convertibility risk, as Stuhlberger calls it, is Argentina being cited as a reference in São Paulo.

On the external front, negotiations between Brazil and the United States gained formal structure: the two countries created a working group to discuss a trade agreement, on the sidelines of the G20 ministers' meeting in Milwaukee. The timing is delicate — Brazil may be forced to negotiate free trade agreements outside Mercosur, given the bloc's state of paralysis. At the same time, Brazil has exhausted its beef quota with China, which will now charge a 55% surcharge on shipments for the rest of the year — a direct blow to agribusiness, which had posted exceptional export performance to the European Union, being the only one among the bloc's five largest trading partners to expand its agri-food exports in the first seven months of 2026. Australia's Lynas Rare Earths announced the acquisition of Meteoric Resources for R$3.5 billion, incorporating the Caldeira Project in southern Minas Gerais — a transaction with obvious geopolitical implications at a moment when critical minerals have become currency of power in disputes among the great powers.

What to watch in the coming weeks: the outcome of the first-round election on October 5 and its effect on fiscal risk perception; the credit market's reaction to the new FIDC rules starting October 13; the launch of integration testing with the tax reform's split-payment platform on October 15; and the trajectory of infrastructure debentures, whose spreads signal that the market has not yet fully digested this year's losses.

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