BRASILIA – Former President of central bank, the Economist Affonso Celso Pastore considers that the strong concentration of National treasure at the beginning of 2021 it is a “very serious” problem of public debt management. To Estadão, Pastore says the president Jair Bolsonaro, senators and deputies have been “deaf ears” to fiscal risks to the economy. “If the government does not have a spending target, what is at risk is government solvency,” he predicts.
Pastore warns that the Brazilian debt will be growing rapidly until 2026 and it will be necessary to respond to this process. “There’s no use talking, words. Concrete actions are necessary ”, he says. He also warns that there is a risk of what is called “financial repression” in the country – an action by the government to create an artificial demand for his papers. Below, excerpts from the interview.
What is happening in the debt market?
The government’s perception of solvency risk has worsened enormously. Last year, gross debt closed at 78% of the START. It will close this year close to 100%. The primary deficit will be 15% of GDP and the government will put an additional 15% of debt. And the Treasury has to roll over all the debt that is falling due. As the solvency risk has increased, the market demands a very high premium to buy the papers. The longer, the higher the risk. In order not to further increase the cost and worsen the dynamics of the debt, the Treasury is opting to exchange for securities with shorter maturities, further reducing the average maturity.
What are the consequences of this situation?
When I discuss this with people, who ask me is the situation so serious, is the risk so great? There are people who think they are and others who don’t. I say: don’t ask anyone. Ask for market prices and check what the prices tell you. The difference in interest for a 1-year and 10-year paper was 200 points. It is now at 600 points. This increased the cost and the Treasury tries to make the bond placement shorter.
But is the market demanding more and more prizes?
The market is demanding premiums because the government’s risk of insolvency has grown. If he had been placing long-term bonds, he would be raising the average cost of debt. The option he made was to shorten the average debt term. The average term has already been shortening since the country lost its investment grade. We have already had times when the debt was rolled over overnight (very short-term financial investments, with daily interest rates, to prevent the loss of the purchase value of Brazilian currencies during the years of hyperinflation). There in Greek calendars, for many years. Only that debt was 30%, 40%. It was not 100%.
Is accelerated debt growth the biggest problem?
This is one of the dimensions of the great fiscal difficulty that we have. We were forced to increase spending. Even if it meets the spending ceiling (constitutional rule that prevents spending from growing faster than inflation), we will have a primary deficit until 2026 (in other words, expenses will exceed revenues), when the ceiling ends. As a result, the debt will be growing rapidly until 2026. The government will have to keep rolling debt that is shorter and shorter. Consequently, the market demands premiums. And that is one of the things that is happening.
Is the government making a mistake in debt management by insisting on shortening?
This can be done in the short term. There’s the secretary of the Treasure, The Bruno Funchal, and everything I am told is a competent guy. With regard to BC, I know several directors and are also competent. They are not beginners. There is no nonsense. The point is this: sure that there will be a credible fiscal anchor. Suppose, for example, that President Bolsonaro decided to send today to the Congress a administrative reform, the most radical there is. That moves employees now and then, saving additional resources. Suppose he sent for a proposal by cutting superfluous things and that he guaranteed that the spending ceiling would be met from now on, without any kind of error. Oh, there’s no use talking, words. Concrete actions are needed.
What would happen in that situation?
I would tell you that the prizes would fall. Let us suppose that both the BC and the Treasury have this model in mind: as long as everything has not been approved, nothing defined, we will shorten the debt. And when all of that is defined, settle the debt again. Temporarily can do that.
What are the consequences of this strategy?
He may be compelled to do a business called financial repression or to pay the premium up there. If you do not want to pay the premium, you risk financial repression.
What is financial repression?
About 80% of the Brazilian public debt is held by banks, funds, pension institutions. If you place insurance companies, you must give 85% of the debt. Non-residents (foreigners) were 20% by 2015. Today, there are already less than 9% in the hands of non-residents. Virtually the debt is in the domestic market. The government can take an insurance company, for example, and say that going forward, it is obliged to increase the proportion of government bonds. How much is in your wallet? Is it 10%? It will be 20%, for example. It starts to generate an artificial demand. When the market sees the risk of this, it starts charging an even higher premium.
Is the large concentration of salaries in the first four months a big problem? The Treasury says it will have the liquidity cushion.
You can put as much liquidity as you want. The problem is solvency. It is not liquidity. If the government does not have a spending target, what is at risk is government solvency. It is not liquidity.
Why don’t members of the government and Congress believe this is happening?
We try to explain, I try, everybody tries. But they insist on not understanding. They make deaf ears. I’m not talking about the Treasury, the BC. Those know. I am talking about senators, deputies and the President of the Republic, who absolutely do not understand the problem.
Is there a lack of a communication strategy to overcome this crisis?
In addition to the communication strategy, there is a lack of an economic strategy that Minister Paulo Guedes has not yet explained.
If they were not quick, does the country enter 2021 in an even more difficult situation because of the high salary?
This is undoubtedly a very serious debt management problem. There’s no doubt.