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Brazil on a Knife Edge

Brazil is struggling. Today, the country has become a global hot spot for the COVID 19 pandemic and the death toll has now surpassed the daily number in the US.

As we have written before, the President has continued to oppose a full lock down and social distancing rules, and some of his supporters are calling for the ousting of regional officials that have instituted their own lock downs and social distancing measures.

Brazil is being hit particularly hard because it was already experiencing economic pressures pre-COVID 19 and this health crisis is now compounding the issues further. GDP has fallen 10%.

Back in March, the central bank injected its largest infusion of liquidity to date, about 17% of GDP. This was a combination of credit to companies and cash to individuals. However, the cash payments of $120 (USD) is not enough to sustain income for basic essentials.

In addition, the country has a serious credit crisis, with overwhelming demand from SME’s. Domestic banks are unwilling to lend because they fear default. Over six million SME’s have applied for credit since March and less than half have received funding. The government is planning to offer banks guarantees of 80% from the Brazilian National Development Bank, but if this does not flow quickly through the system, expect a expect a significant wave of bankruptcies.

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