Key facts
- Advisers to Brazil's leading presidential candidates have proposed differing methods to lower long-term interest rates.
- One proposal involves Treasury buybacks of government bonds, similar to actions by the U.S. Treasury.
- The opposing view emphasizes urgent federal spending cuts as the only sustainable way to reduce borrowing costs.
- Brazil's government bonds maturing in 2045 currently carry real interest rates of about 7.5%.
- The country's gross public debt has increased to 81.9% of GDP since the start of Lula's current term.
BRASILIA, Aug 25 (Reuters) - Brazil's presidential campaigns are clashing over how to bring down long-term interest rates, with advisers to the leading candidates offering sharply different prescriptions for reducing borrowing costs across the economy.
The debate has intensified ahead of Brazil's October 4 election and as investors continue to demand hefty premiums to hold long-dated government bonds, increasing financing costs for both the state and private sector and fueling concerns about the country's fiscal outlook and rising debt burden.
In an interview, Jose Sergio Gabrielli, chief coordinator for President Luiz Inacio Lula da Silva's re-election platform, proposed Treasury buybacks of government bonds as a way to curb long-term yields, similar to those recently carried out by the U.S. Treasury. Gabrielli criticized an editorial in Folha last week that called for urgent federal spending cuts to avert a fiscal crisis and bring down interest rates, saying the piece portrayed Brazil as being "on the brink of chaos."
Neither Lula's campaign nor the Treasury immediately responded to requests for comment.
Meanwhile, former Mines and Energy Minister Adolfo Sachsida, who joined the economic team of Lula's leading rival Flavio Bolsonaro last week, said that spending cuts, not market intervention, are the only sustainable way to lower rates. In a post on X, he described Gabrielli's proposal as an artificial and "mediocre" attempt to suppress borrowing costs, stating it would inject liquidity, raise inflation, and consequently necessitate higher interest rates.
Brazil is currently paying about 7.5% in real interest rates on government bonds maturing in 2045, underscoring the hefty premium investors demand to finance the country over the long term amid doubts about its ability to control the rapid growth of mandatory spending.
Analysts are skeptical either candidate will be able to rein in Brazil's public finances, although market reactions to polls suggest the market favors Bolsonaro's program. The country's large interest bill has been the main driver of rising gross public debt, a main solvency metric. Gross debt has increased by more than 10 percentage points since Lula began his third, non-consecutive term in 2023, to 81.9% of GDP.
Although Brazil's Treasury carried out a large-scale bond buyback in March following the U.S.-Israeli conflict with Iran, such operations are rarely used by the debt manager. In public remarks, Treasury officials have argued that interventions in the secondary bond market to address high volatility follow a sequence of reducing auction supply, shrinking offer sizes, canceling auctions and, only as a last resort, conducting buybacks or other liquidity operations.