The Brazilian government is in a dilemma. In a last-ditch attempt to stop the appreciation of the Brazilian real undermining the competitiveness of its exporters, the government has imposed a new tax on foreigners buying local debt.
Brazil’s exporters are happy that the government has finally acted. But analysts are concerned that the authorities might suffer a rising risk premium from deterring foreign investors, without achieving the desired benefit of halting the real’s appreciation.
In mid-2007, the Brazilian real was trading at two to the dollar, and by the end of the year it had reached a new level of 1.77.
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