New fiscal rule is received with relief, concern and euphoria by the market

With relief, concern and a good dose of euphoria, the new fiscal rule was received by market agents.

The relief came due to the waiting time and the doubt about what would be the prevailing economic thinking: that of “expenses is life”, as in the mandate of Dilma Rousseff, or that which does not separate social responsibility from fiscal responsibility. It ended up being a mixture of the two, leaning a little more towards the fiscal side.

The concern is about the effectiveness of the framework in controlling expenses and reducing the public debt in a consistent trajectory. The outcome is still not clear, because, for it to work, the rule depends more on a billionaire increase in revenues than on the containment of expenses.

According to the proposal by the Minister of Finance, Fernando Haddad, spending will always increase — with or without growth in revenue or GDP. The success of the new rule will depend, to a large extent, on the government’s willingness and firmness to hold back the spending impetus of the government and the National Congress.

On Thursday, euphoria prevailed with the idea that a long-awaited chapter had been overcome. The Ibovespa closed up 1.89%, at 103,713.45 points, and the dollar fell to R$5.09.

Future interest rates also dropped — and, speaking of interest rates, a minimal understanding of the new fiscal framework, along with reading the Central Bank’s quarterly inflation report, already provide a clear conclusion: there is no room for a drop in the Selic rate anytime soon.

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*Posted by Tamara Nassif