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An uncertain role on centre stage

A lot is riding on Brazil’s success. It has always been the dominant economy in south America but until Argentina collapsed it did not have to play a leadership role in sustaining investor sentiment about the region. Today Brazil must rise to its economic challenges or be held responsible not only for its own stagnation but for sinking south America as an economically significant continent.

Luiz Inacio
Lula da Silva

The magnitude of the problems facing Brazil is clear from JPMorgan's list of country spreads in its EMBI+ bond index. Its spread is 838 basis points over treasuries, roughly the same as two countries only just coming out of default: Pakistan and Ukraine. It is 186bp wide of Turkey, 263bp wide of Russia and 565bp wide of Mexico or South Africa. It is 650bp wider than Poland, a country that has completely turned the tables on it, repaying $2.5 billion in bilateral obligations dating back to 1970s, when Brazil helped out Poland with export credits.

Clearly the financial markets have relatively little faith in Brazil's long-term prospects, despite their love affair with its present economic team.

To some extent the issue is geographical. Poland has benefited greatly from bordering on the EU and from its aspirations to join that union, and Mexico, with Nafta, has successfully leveraged its north American status.

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