Brazil’s Galipolo says local currency debt shifts risk to investors

Brazil's central bank governor, Gabriel Galipolo, highlighted on Tuesday that issuing debt in local currency offers flexibility for the government but shifts risks to investors. During an event in Sao Paulo, Galipolo clarified that the central bank determines the interest rate, not the borrower. Despite Brazil's debt primarily being denominated in Brazilian reais, Galipolo cautioned that investors still face opportunity costs from financing this debt.

He pointed out that the Brazilian real is a highly liquid and actively traded currency, with a daily turnover of $110 billion. Galipolo underlined that Brazil's foreign exchange market exhibits unique characteristics that distinguish it from other emerging nations. Additionally, he emphasized that the country's international reserves are ample to cover debt indexed to foreign currencies.

Galipolo explained that long-term securities expose investors to simultaneous risks of exchange rate fluctuations and changes in the yield curve. He acknowledged that currency shocks can arise from a loss of credibility, and such perceptions of risk can endure for extended periods. Galipolo stated that investor risk perception is inherently linked to a series of events related to the transmission of shocks and a certain level of credibility. He noted that Brazil relies heavily on borrowing in local currency.