Realing Rio

In 2015, Brazil’s economy shrunk by 4% and it will contract 3.5% more in 2016. Moreover, inflation is 10.7% and rising quickly. Yet the central bank didn’t raise rates. This may be because debt service already consumes a whopping 8% of GDP and higher rates will make default more likely. But once investors realize this and that inflation won’t be fought, investors may well dump reals, worsening inflation. Yikes.