A bold proposal has reached the radar of Lula’s new term and is dividing economists: make public debt cheaper to carry, or risk a surge in the dollar.
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Just days after his reelection, Lula already has a R$10.9 trillion problem at the door. Gross debt has reached 82.5% of GDP, the highest level since 2021, and estimates point to a fiscal adjustment of at least R$250 billion over four years. Against this backdrop, a proposal by André Lara Resende, one of the architects of the Real Plan, to bring the Selic rate down from 13.75% to 7.5% has landed on the president’s radar. Two members of the economic team told Folha that no meeting is scheduled, and Lula intends to hear several experts before setting the course of his new term.
The thesis: interest rates are the villain
André Lara Resende
For Lara Resende, the problem is not primary spending. Citing an IMF projection, he notes that Brazil’s primary deficit is only 0.4% of GDP, among the smallest in the world. What weighs is the interest bill: with an average cost of 12.68% a year on the debt, he calculates that financial charges add roughly R$1.4 trillion a year to the debt, about 10.5% of GDP.
His recipe includes a National Fiscal and Monetary Council that would set coordinated targets for the next four to five years, and a gradual fall in the Selic over 12 months. Foreign reserves of about US$350 billion would serve as a shield if the exchange rate wobbled. The idea has already drawn applause in the PT: Gleisi Hoffmann called it fundamental for confronting the “offensive” against fiscal policy.
The counterattack: the dollar
Markets reacted with apprehension, and critics are putting numbers on it. Maílson da Nóbrega, a former finance minister, estimates that an artificial cut in the Selic could push the dollar into the R$6 to R$7 range, with capital flight. Economist José Luis Oreiro, though sympathetic to the diagnosis, says the solution suffers from naive voluntarism. According to Times Brasil, most economists warn that a rapid fall in the Selic would pressure the dollar or require heavier intervention in the currency market.
Maílson da Nóbrega
Sérgio Vale of MB Associados recalls 2012, when a politically driven cut in rates pushed inflation to the 6.5% ceiling. In his view, doing it now, with today’s perception of risk, would bring more depreciation and more inflation. There is also fear that the Central Bank would lose autonomy, and critics argue that a high Selic is a consequence of fiscal distrust, not its cause.
What is at stake
Lara Resende himself admits the cut could accelerate inflation at first, especially if capital leaves the country. The government’s equation is familiar: the Selic remains at 13.75% after this week’s Copom decision, groups such as the CNI and the Força Sindical are demanding cuts, and the dollar has already reacted to the runoff. Lula, who has long criticized high interest rates, must decide whether to bet on a regime change or on a more gradual path, backed by a fiscal adjustment that convinces the market.
Both sides agree on one point: interest is central to the problem. They differ on who should move first, rates or the public accounts.
Sources: Folha de S.Paulo (via Brasil 247), Times Brasil, Money Times, Jornal GGN.
