By Mohammed Waseem
Brazil is a beautiful country in South America, bounded by the Atlantic Ocean on the east. The economy of Brazil has faced several crises between 1981 and 1993. In 1994, they pegged their currency (Brazilian Real) to the US Dollar to break inflationary expectations. But later in 1999, this was reversed and Brazilian Real was no longer pegged to the US Dollar, to moderate the downturn in economic growth.
The economy grew rapidly between 2004 and 2010; in fact, even during the world financial crisis between, the economic growth recorded was as high as 7.5%. It was in the news in the first quarter of 2014 that Brazil was near recession, as Standard & Poor’s had downgraded the country’s debt to be near junk, with a rating of BBB-. Now in the third quarter, the economy has slipped into recession.
A junk debt is a bond rated BBB or below because of its high default risk and are not generally legal for purchase by banks. Such bonds are also known as ‘high yield bonds’ due to the level of speculation they carry.
Brazil slipped into technical default and cut the growth forecast for 2014. The GDP fell by 0.6% in the second quarter, from what it was in the first quarter. ABC news suggests that Argentina will be hurt the most due to this, as the latter depends heavily on exports to Brazil and is already in recession, while the people of the country face inflation of 40%.
The Telegraph quoted S&P saying that the situation was due to fiscal slippage, bad economic management and one-off tricks that flattered the public accounts, all of which resulted in a contraction of investments to lower confidence level.
In June, 2014, the GDP growth rate was negative and there is a probability of 80% that the rate will be negative now, according to Brazilian Bubble; and Trading Economics reports that the annual GDP growth rate for 2014 in -0.9%; they are trying to revive growth by cutting taxes.