Brazil's fiscal credibility crisis deepens as markets price in years of instability

The moment Brazil wakes up to the consequences of Lula's reelection arrived in concentrated and brutal fashion this week: in less than ten days, the dollar climbed to its highest level of the year, the Ibovespa racked up six consecutive losing sessions down to its lowest point since January, interest rate futures surged, and the credit market began pricing in a crisis of confidence that could last for years. The epicenter is not merely the electoral outcome — it is the absence, so far, of any clear signal that the president's fourth term will have fiscal discipline as a priority.

The dollar closed at R$5.487, the highest level of the year, in a session marked by broad-based deterioration in Brazilian assets. The Ibovespa retreated 1.42% to 165,529 points, pressured above all by Petrobras, whose preferred shares fell 3.79%, and by Vale, which gave up 2.85%. Interest rate futures advanced across all maturities, with the January 2029 contract moving from 14.96% to 15.13% — a level that signals the market has not only ruled out additional Selic cuts but has begun to price in the possibility that the easing cycle begun in March will be ended prematurely. The Copom meets this Wednesday (the 4th) and, according to a consensus broadly formed in the market, is expected to hold the benchmark rate at 13.75%, interrupting the cutting cycle. But the decision itself matters less than the tone of the statement: analysts and portfolio managers are waiting for the central bank to reaffirm its independence and its commitment to inflation control in the face of a politically turbulent environment.

The immediate catalyst for the stress was the circulation of a document by economist André Lara Resende proposing an accelerated reduction of the Selic to around 7.5% in 12 months through a heterodox rearrangement of monetary and fiscal policy. News that Lula might receive Lara Resende to discuss the proposal — denied by Finance Minister Dario Durigan — was enough to trigger a wave of selling. John Cochrane himself, of Stanford University, whose fiscal theory of the price level serves as the theoretical basis for the idea, told Folha de S.Paulo that Lara Resende's proposal is "sophisticated and intriguing," but conceded there is no historical precedent for it. In this context, that formulation amounts to a warning. Columnists and economists across the political spectrum have pointed out that any variant of the "Lara Resende plan" would fail before even being implemented, given its dependence on institutional credibility to work — credibility that the market itself is, at this very moment, calling into question.

The first Focus bulletin released after Lula's second-round victory distilled that distrust into numbers: economists raised their projections for inflation, interest rates, and the dollar across the entire horizon through 2029. In parallel, GDP growth estimates for 2026 were cut from 1.80% to 1.76%, a sign that the market is already beginning to discount the paralysis of investment described in that same Folha de S.Paulo report: managers and companies have chosen to pause projects while awaiting concrete signals about Lula 4's economic policy. The National Treasury, for its part, published projections placing gross debt at 91.5% of GDP in 2036 should the country fail to move toward surpluses — a scenario that Minister Durigan himself described as undesirable, but without yet offering the fiscal anchor the market is seeking.

The country's tax architecture continues its transformation, and the coming days will be dense on that front. The government will formalize the provisional measure for the Selective Tax, the so-called "sin tax" created by the tax reform to levy additional charges on products harmful to health and the environment. At the same time, more than twenty entities from the tax sector are requesting the postponement of the CBS — the Contribution on Goods and Services — until 2028, and Senator Eduardo Braga, who holds the dual role of rapporteur of the 2027 budget and of the CBS in the CAE, declared he is not convinced that the 11.3% rate set by the TCU is appropriate, floating a number as low as 9%. The Federal Revenue Service has promised a 2.0 version of the CBS and IBS regulations for next week. It is a legislative process that, combined with macro instability, creates additional layers of uncertainty for the business sector.

The default picture aggravates the diagnosis. Serasa recorded 84.2 million delinquent individuals in September, equivalent to 51.1% of the adult population — the first time in the historical series that the halfway mark has been crossed. The phenomenon is already visible in corporate behavior: Enel São Paulo has begun to protest electricity bills with just a few days of delay at notary offices, signaling unprecedented tightening on energy consumer delinquency. High-end furniture chain Kitchens filed for judicial recovery with R$300 million in debt, and Raízen, the sugarcane producer whose shares trade both on B3 and abroad, detailed a creditor payment schedule that includes the option of receiving 20% of the total only in 2047 — a 21-year window that by itself describes the magnitude of its financial stress.

On the external front, the Brazilian government is awaiting a first draft proposal from the United States on tariff reduction next week, according to Minister Márcio Elias Rosa. The Democratic victory in the US midterm elections — which returned the House majority to the party opposing Trump — should not, according to analysts, ease the weight of tariffs on Brazilian exports, given the continuity of the already-installed protectionist agenda. For next week, the market will have to digest simultaneously the Copom statement and its reading of the inflation situation, Lula's first moves in assembling the new term's economic team — including the six appointments he will be able to make to the central bank's board of directors by the end of 2027 — and third-quarter results from retailers such as C&A and Riachuelo, which should confirm the deterioration of consumption. The immediate risk is that the absence of a credible fiscal anchor transforms what is today instability into something structurally harder to reverse.

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