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THE BRAZILIANGDPGDPUYour browser does not support the element. real holds an ignominious title this year: it is the worst-performing major currency, down by more than 20% to a record low of almost 6.3 to the dollar. The situation has grown even uglier over the past week, with the sell-off accelerating despite several interventions by the central bank.The slump is fuelled by panic about fiscal plans. In November the government of Luiz Inácio Lula da Silva, the left-wing president, announced a long-awaited programme to curb spending, including earnings caps for public-sector workers. At the same time, though, the finance minister, Fernando Haddad, promised extensive tax cuts for low- and middle-income workers. Investors took the announcement as proof of insufficient commitment to fiscal discipline. Given Brazil’s budget deficit of almost 10% of and gross debt of nearly 90% of , jitters are understandable.On December 17th the central bank sold over $3bn in currency reserves in a failed attempt to prop up the real. It has already raised interest rates three times since September, including a surprise increase of a full percentage point on December 11th. Even as many emerging-market central banks have begun to cut rates, taking their cue from the Federal Reserve, investors expect more monetary tightening in Brazil over the coming year. The country’s two-year government bonds now yield more than 15%, up from just under 10% at the end of 2023.But monetary hawkishness is not cutting the mustard. Financial markets are clamouring for a fiscal -turn, which the government is reluctant to offer. “We know exactly how we got here, so we know how to get out of here. We need to walk backwards,” says Alberto Ramos, head of economic research for Latin America at Goldman Sachs, a bank. “The more you wait, the higher the risk that things will be done the hard way, and the market will force the correction. The symptoms of a crisis are there.”
