Camila Villa Durand writes: \u00a0Brazil is confronting a triple crisis: a severe economic downturn, a corruption scandal that has ensnared the commanding heights of the economy and politics, and a government crisis that may soon culminate in the impeachment of President Dilma Rousseff. Regardless of whether Rousseff is removed from power, the key issue raised by the impeachment threat \u2013 her management of fiscal policy \u2013 underscores the need to overhaul Brazil\u2019s economic institutions.<\/p>\n
In 2014, facing re-election, Rousseff stepped up the practice of running overdrafts in public commercial banks in order to pay for social programs.<\/p>\n
In 2015, however, the federal accounting tribunal (TCU) rejected her accounts and accused Rousseff of committing fiscal irregularities. After the TCU decision, she decided to \u201cpay\u201d off these \u201cloans\u201d in December 2015.<\/p>\n
It\u00a0is crucial to rethink Brazilian institutions, notably the central-bank\u2019s relationship with the government.<\/p>\n
Technically, a significant part of the repayment of this \u201cborrowed\u201d money came from the distribution of central-bank gains. But what gains? The accounting rules applied to the Central Bank of Brazil (BCB) allow for bi-annual transfers of gains (and losses) to the Treasury, which include unrealized profits<\/i>. Currently, one of the most important sources is the accounting valuation of foreign-exchange reserves on the BCB\u2019s balance sheet.<\/p>\n
Brazil has more than $355 billion in reserves.\u00a0A 2008 law created a procedure called \u201cforeign exchange equalization,\u201d similar to a swap. The BCB transmits to the Treasury the carrying cost of foreign-exchange reserves (the difference between their profitability, including changes in exchange rates, and the average funding cost) and the result of the currency swaps carried out in the domestic market (which are settled in local money)..<\/p>\n
But such a massive distribution of a central bank\u2019s gains can generate potential conflicts with its mission. A monetary authority is supposed to manage the money supply effectively, not generate gains. The BCB\u2019s increasing gains, based on unrealized profits, risk seriously undermining its autonomy.<\/p>\n
That autonomy is not based on law. The BCB\u2019s governors have no fixed-term mandate and are supposed to follow the provisions of the National Monetary Council, a politically appointed body. But, since the adoption of inflation targeting in 1999, a certain degree of operational autonomy has been crucial to maintaining the credibility of monetary policy.<\/p>\n
So what happened after the BCB transferred its unrealized profits to the Treasury? The government\u2019s \u201crepayment\u201d of its \u201cloans\u201d caused liquidity to grow, forcing the BCB to intervene to meet its key interest-rate target. But open-market operations can be conducted only with Treasury securities: Brazil\u2019s Fiscal Responsibility Law prohibits the BCB from issuing its own.<\/p>\n
Even if the Treasury had issued R$40 billion in bonds within a week of the \u201csettlement\u201d of Rousseff\u2019s \u201cloans,\u201d the government could legally have decided not to issue new securities, after all, blocking the proper functioning of monetary policy.<\/p>\n
The only institutional answer, formulated recently by Finance Minister Nelson Barbosa, has been to introduce the possibility of central-bank remuneration of bank reserves.<\/p>\n
The crucial reform is to permit the BCB to issue its own securities.<\/p>\n
Central bank bonds are a critical tool \u2013 especially for emerging countries \u2013 for managing the domestic monetary<\/i> effects of huge amounts of foreign assets, particularly with respect to liquidity. Such instruments can ensure the central bank\u2019s autonomy in managing money, while stimulating the development of the local bond market.<\/p>\n
Brazil has an opportunity to restructure its key economic institutions, by combining the creation of new monetary tools with an overhaul of the relationship between the BCB and the Treasury.\u00a0<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"
Camila Villa Durand writes: \u00a0Brazil is confronting a triple crisis: a severe economic downturn, a corruption scandal that has ensnared the commanding heights of the economy and politics, and a government crisis that may soon culminate in the impeachment of … Continue reading