Central Bank regulates corporate bond-buying program

. Jun 25, 2020
Brazil's Central Bank sets out rules for buying corporate bonds Image: Talaj/Shutterstock

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We’re covering today the Central Bank’s plan to purchase corporate bonds. The future for aviation giant Gol. Accounts court takes a jab at Bolsonaro. And a plague approaches Brazil.

Central Bank sets out rules for buying bonds

Early in May, Congress passed the so-called “War Budget,” splitting the federal budget into two

, creating a new separate financial plan for coronavirus-related spending. The provision allowed the Central Bank to purchase corporate bonds in order to provide liquidity in a market squeezed by the crisis. On Wednesday, the bank published the <a href="http://www.in.gov.br/en/web/dou/-/circular-n-4.028-de-23-de-junho-de-2020-263184742">guidelines</a> to be followed in said transactions.</p> <p><strong>Why it matters.</strong> So far, most attempts by the government to enhance credit availability for struggling businesses have flopped —&nbsp;because banks have simply adopted a risk-averse approach. Most of the new credit being issued amid the pandemic is going to big corporations, leaving more vulnerable businesses — which make up the majority of companies in Brazil — hanging out to dry.&nbsp;</p> <p><strong>Criteria. </strong>We have broken down the main rules in the Central Bank&#8217;s ordinance:</p> <ul><li>Bonds must have at least a BB-minus rating from one of the three main agencies: Fitch, Moody’s, and S&amp;P, in line with Brazil&#8217;s own rating.</li><li>The cap for high-risk assets in the Central Bank&#8217;s portfolio will be 10 percent. Bonds from the same company cannot comprise more than 7.5 percent of the bank&#8217;s total investments. However, these rules will only kick in after purchases amount to at least BRL 1 billion, giving the bank more flexibility for the first operations.</li><li>The bank will not be able to purchase more than 25 percent of issued bonds; 35 percent for companies with yearly gross revenue of up to BRL 300 million.</li></ul> <p><strong>Our take. </strong>Congress ordered that bonds of small- and medium-sized enterprises should be given priority, but these companies will have trouble complying with all requirements set up by the bank, especially when it comes to rating by the top agencies in the business.</p> <p><strong>Caution. </strong>The government must be wary about issuing currency to fund such operations. This tool was widely used in the past and is considered to be one of the main causes of Brazil’s hyperinflation crisis of the 1980s.</p> <hr class="wp-block-separator"/> <h2>Bold recovery projections for Gol</h2> <p>Brazil&#8217;s leading domestic airline Gol has informed investors of a spike in demand for flights during the month of June —&nbsp;despite the fact that the pandemic has shown no signs of slowing down in Brazil. Last week, sales were up 24 percent from the previous week —&nbsp;and 196 percent when compared to the week of March 22. Still, numbers are 81 percent below those of the same week in 2019.</p> <p><strong>Why it matters.</strong> The aviation industry was one of the hardest hit by the pandemic, with the very survival of Brazil&#8217;s three largest airlines being called into question.</p> <p><strong>Flights.</strong> Before the coronavirus, Gol operated roughly 900 flights a day — which dropped to 50 in April, and 100 in June. By December, the company hopes to offer 80 percent of its regular selection of flights.</p> <p><strong>Bailout.</strong> Airlines have been in negotiations with the National Development Bank (BNDES) for a BRL 2 billion loan. &#8220;We must get to a point that is advantageous for banks, but also for the companies,&#8221; Gol CEO Paulo Kakinoff said this week.</p> <p><strong>Careless?</strong> We at <strong>The Brazilian Report</strong> have reached out to many people who have flown during the pandemic —&nbsp;and they do not paint a pretty picture. Almost all reported excessive gatherings of people while going through security checks and departure gates. Even if airports seem to be empty, the planes that do fly are often full to the brim.</p> <hr class="wp-block-separator"/> <h2>&#8220;No plan&#8221; against the coronavirus, says accounts court</h2> <p>The Federal Accounts Court (TCU), a sort of audit tribunal that monitors public spending, passed a report claiming that the government lacks a &#8220;plan&#8221; against the coronavirus. The result is a continually growing number of deaths and the squandering of public money that is not spent wisely.</p> <p><strong>Why it matters.</strong> A report from the TCU increases the pressure on the Jair Bolsonaro administration and could give grounds for impeachment requests against the president.</p> <p><strong>Transparency.</strong> The court ordered the Office of the President&#8217;s Chief of Staff to release the minutes of all meetings of the government&#8217;s crisis committee. This body was created three months ago, but President Jair Bolsonaro has only this week signed a decree giving it any decision-making power.</p> <div class="banner_covid"> <div class="texto"> <h3>COVID-19 TRACKER</h3> <p>Keep up to date with all of the latest news on the coronavirus outbreak in Brazil in real-time</p><img class="mobile" src="https://brazilian.report/wp-content/uploads/2020/03/imagem_virus.png"> <a href="https://brazilian.report/coronavirus-brazil-live-blog/" class="botao">Latest</a> </div> <div class="imagem desktop"> <img src="https://brazilian.report/wp-content/uploads/2020/03/imagem_virus.png"> </div> <div class="clearfix"></div> </div> <hr class="wp-block-separator"/> <h2>Locust swarm puts two states on red alert</h2> <p>The Agriculture Ministry has placed Brazil&#8217;s southernmost states of Rio Grande do Sul and Santa Catarina under a &#8220;state of sanitary emergency,&#8221; as a swarm of locusts traversing Argentina approaches the country&#8217;s border. Argentinian authorities are monitoring the plague of insects in real-time, and you can follow along <a href="https://geonode.senasa.gob.ar/maps/1806">here</a>.</p> <figure class="wp-block-image size-large"><img loading="lazy" width="1024" height="575" src="https://brazilian.report/wp-content/uploads/2020/06/locust-cloud-1024x575.png" alt="locust cloud" class="wp-image-43321" srcset="https://brazilian.report/wp-content/uploads/2020/06/locust-cloud-1024x575.png 1024w, https://brazilian.report/wp-content/uploads/2020/06/locust-cloud-300x169.png 300w, https://brazilian.report/wp-content/uploads/2020/06/locust-cloud-768x431.png 768w, https://brazilian.report/wp-content/uploads/2020/06/locust-cloud-1536x863.png 1536w, https://brazilian.report/wp-content/uploads/2020/06/locust-cloud.png 2048w, https://brazilian.report/wp-content/uploads/2020/06/locust-cloud-610x343.png 610w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Source: SENASA</figcaption></figure> <p><strong>Why it matters. </strong>A single swarm can contain up to 150 million insects per square kilometer. Over 24 hours, a swarm of that size can devour as much food as 20,000 cows.</p> <ul><li>The cloud was formed in Paraguay, where corn crops were destroyed. In Argentina, it has affected the provinces of Santa Fé, Formosa, and Chaco — home to sugarcane and cassava crops.</li></ul> <p><strong>Counter-attack.</strong> There is not much authorities can do against locusts besides dumping tons of pesticides on them&nbsp;— which is harmful to the environment and human health. A union representing agricultural aviation companies has made 426 crop-spraying planes available.</p> <p><strong>Origins.</strong> Locust clouds form after climate alterations —&nbsp;changes in temperature, humidity, or rainfall can create the ideal conditions for a population boom. But extreme climate events, which used to be rare, are getting more frequent.&nbsp;</p> <div id="buzzsprout-player-2725189"></div> <script src="https://www.buzzsprout.com/299876/2725189-95-brazil-s-climate-crisis-has-already-begun.js?container_id=buzzsprout-player-2725189&amp;player=small" type="text/javascript" charset="utf-8"></script> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Economy.</strong> In the minutes of its latest meeting, the Central Bank&#8217;s Monetary Policy Committee projected that Brazil would see a gradual economic recovery beginning only after Q3 2020. The bank publishes its latest quarterly inflation report today, which will include more projections for the economy. Roberto Campos Neto, the bank&#8217;s chairman, will also hold a press conference at 11 am (Brasília time).&nbsp;</li><li><strong>Fake news.</strong> The Senate should hold a vote today on an <a href="https://brazilian.report/power/2020/06/22/fake-news-bill-treats-all-brazilian-netizens-as-potential-criminals/">anti-fake news bill</a> that has flown under the radar somewhat, yet received harsh criticism from experts. Among its most controversial points, it would require social media users to present proof of identity before accessing the platforms, in order to deter bots or fake accounts. Besides being a data privacy concern, freedom of speech advocates say the move would exclude poorer populations from social media.</li><li><strong>Austerity.</strong> The Supreme Court ruled to forbid states and municipalities from cutting civil servant salaries when administrations&#8217; spending on wages and pensions tops 60 percent of current revenues. That possibility was envisioned by the 2002 Fiscal Responsibility Law, but had always been suspended, waiting for a nod from justices. The court also decided that the executive branch cannot limit other branches&#8217; budgets if revenue doesn&#8217;t meet expectations —&nbsp;saying it would hurt the independence between them. Some have interpreted this as yet another manifestation of members of the Justice system <a href="https://brazilian.report/power/2020/04/08/brazilian-judges-refusing-to-pitch-in-with-covid-19-effort/">refusing to pitch in with austerity efforts</a>.&nbsp;</li><li><strong>Bolsonaro.</strong> A three-judge panel in Rio de Janeiro&#8217;s top state court will decide today on the future of a probe into a money-laundering scheme allegedly headed by Senator Flávio Bolsonaro. The politician claims that lower courts shouldn&#8217;t be given jurisdiction over his case, asking it to be tried by a panel of senior state judges. If today&#8217;s ruling goes his way, it could nullify previous decisions on the investigation, including last week&#8217;s <a href="https://brazilian.report/power/2020/06/18/arrest-fabricio-queiroz-pressure-president-jair-bolsonaro/">arrest of Fabrício Queiroz</a> —&nbsp;a fixer for the Bolsonaros suspected of operating the scheme for Senator Flávio.

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