How bad can things get in Brazil? January's devaluation of the real was the government's nightmare outcome. Its success in beating inflation since 1994 depended on the strength of the currency. Take that away and you open the floodgates to inflation and recession.
Both are now firmly on the agenda. The government accepts inflation this year could be as high as 10%. It could be much worse. If the currency continues to slide, some analysts say, inflation will reach 50%. As for recession, many expect the economy to shrink by as much as 6% in the next 12 months.
And the government's ability to act could be severely curtailed if a new nightmare situation also comes true. One result of deflation, and of the sky-high interest rates the government is using to ward off further slides in the currency, is that the size of the public debt stock has swollen...
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