Brazil Faces Financial Crisis After Downgrade

A year into her second term as the President of Brazil, Dilma Rousseff faces an economic crisis in a country that was once a rising star on the global stage. On Wednesday, Standard & Poor’s downgraded Brazil’s credit rating to junk status causing a sell off of Brazilian financial assets. Political leaders in Brazil were quick to cast the blame for this crisis on slumping markets such as China, however this crisis was more self-inflicted than anything else.

Economists argue that Brazil’s issues began in 2010 with a series of policy changes that Rousseff sought after when the Brazilian economy was slowing after the highest growth rate they had seen in two decades at 7.6%. Rousseff had the central bank reduce interest rates, which caused a credit spree among consumers who are now unable to payback loans. She also cut taxes for certain industries and imposed price controls on electricity and gasoline, causing massive losses for public energy companies. In 2014, Brazil grew at just 0.1% and the economy is expected to shrink by almost 3% this year. With interest rates soaring and Brazil’s unemployment rate being at 7.5%, the highest in 5 years, historians say that Rousseff’s presidency is among the worst for Brazilian economic growth over the last century.

There are some positive things for Brazil to look at, however. First, there are the programs where the government pays monthly cash stipends to the poor. These programs have contributed immensely to the declining inequality since the Worker’s party took office in 2003. It is widely agreed in Brazil that these programs have done an adequate job at fighting poverty in a cheap way. Second, there are the supporters of Rousseff who argue that Brazil still has a strong financial footing. Brazil has large holdings of Unites States treasury bonds worth about 370 billion. With these holdings, Brazil has ruled out the need for emergency loans from the International Monetary Fund (IMF). Lastly, the government seems determined to fix these issues quickly, as seen by Rousseff calling for an urgent cabinet meeting. José Guimarães, a congressman from the Workers’ Party, said, “This downgrade won’t diminish the government’s spirit to find solutions for balancing the Brazilian economy.”