GRANDES QUESTÕES sobre a FISCAL, DÍVIDA E JUROS BRASILEIRO | Second Level #31

Episode Overview

• This episode features Bruno Funchal (CEO of Bradesco Asset Management and former Secretary of the National Treasury), exploring the intersection of Brazil's complex fiscal politics and private investment strategies.
• The discussion frames fiscal responsibility not as a political preference, but as a critical mechanism that directly dictates inflation, interest rates, and the survival of companies in the real economy.
• Funchal contrasts the "chaotic" reality of public sector management with the efficiency-driven private sector, offering a unique insider's perspective on how government decisions actually get made.
• The conversation shifts from macroeconomic theory to practical asset management, covering the risks of high corporate debt, the "crowding out" effect on private investment, and the strategic shift in banking from selling products to building ecosystems.

Key Concepts

Interest Rates as Consequences, Not Causes A central economic misunderstanding is that high interest rates create debt. In reality, interest rates are the "price tag" of past fiscal irresponsibility. When a government runs deficits (spending more than it earns), it must borrow from society. The interest paid today is the cost of funding those past deficits. Therefore, you cannot lower interest rates by decree; you must solve the root cause—the accumulation of primary deficits—to lower the risk premium demanded by lenders.

Budget Rigidity vs. Flexibility The primary issue with Brazil's public finances is not a lack of revenue, but extreme rigidity. Approximately 95% of the federal budget is mandatory or constitutionally "stamped," leaving the government with almost no room to allocate resources to modern needs like technology. True fiscal adjustment requires "unlinking" and "desindexing" the budget. Without this, even a perfect fiscal rule fails because the machinery of the state is legally locked into spending patterns from the 1980s.

The "Crowding Out" Effect High government interest rates create a phenomenon known as "crowding out." When the government offers attractive risk-free returns (high yields on bonds), it sucks capital away from the productive sector. Investors move money out of risk assets (equities, corporate expansion) and into government debt. This deprives companies of capital for investment and growth, effectively stalling economic progress because the state is competing for—and winning—the available cash.

Public vs. Private Sector Management Friction There is a fundamental "culture shock" between the two sectors regarding incentives and time. The private sector thrives on predictability, planning, and efficiency ("making things grow"). The public sector is driven by a "24/7 chaotic" environment where success is often defined as "preventing something bad from happening." This lack of predictability is a feature, not a bug, of the political system, and private agents must understand that political logic (reelection/survival) always overrides economic logic unless the cost (market reaction) becomes too high.

The "Nervousometer" (Market Feedback Loops) The financial market acts as an immediate constraint on political action. When politicians propose fiscally irresponsible measures, the market reacts instantly (interest rates spike, currency devalues). This provides a quantifiable "price tag" for bad policy. This feedback loop is essential because it forces even populist governments back toward the center; they realize that radicalism becomes too expensive to sustain politically once it hits the economy.

Macro-Micro Loop in Corporate Credit Macroeconomic policy dictates corporate survival. When the government lacks credibility, rates rise to curb inflation. These high rates (often 20%+) act as a punishment for the productive economy, draining corporate cash flow and increasing bankruptcy risks. Asset managers must be hyper-critical of "credit spreads" in this environment. If the spread (extra yield over risk-free rate) shrinks while the risk of default rises due to high rates, the asset is dangerously mispriced.

Strategic Ecosystems Over Vertical Integration The banking and asset management industry is shifting from a product-centric model ("buy this fund") to a client-centric model ("what solves your problem?"). Large institutions are realizing they cannot be the best at everything. Instead of vertical integration, they are adopting open architecture—partnering with specialized boutique firms for niche strategies (like crypto or specific equities) while providing the distribution power and stability of a large bank.

Quotes

• At 0:09:42 - "At the time [of the Fiscal Responsibility Law], debt was 50% of GDP... It reached 90% in the pandemic, fell to 70%, and now is at 80%. And our peers, the emerging countries, debt is 60% of GDP." - Funchal illustrates why the fiscal situation is urgent; Brazil carries a significantly higher debt burden than comparable economies.
• At 0:11:17 - "Literature shows us that the best way to make an adjustment is by looking at the expense... If you look at the revenue side, the population knows that at some point that space will end, or they will be called for a new tax increase." - Explaining why cutting spending is more effective for long-term economic growth than raising taxes, which stifles investment.
• At 0:13:39 - "Interest today is the deficit of yesterday." - A critical macroeconomic lesson correcting the misconception that high interest rates are the problem; they are merely the price tag for previous overspending.
• At 0:17:00 - "In the public sector, many times success is avoiding that something bad happens... In the private sector, success is making something good grow." - The host summarizing the stark difference in incentives and operational goals between the two sectors.
• At 0:19:46 - "You have the demand of the president, of the 20 ministers, of the 81 senators, of the 5,000 mayors, of the 27 governors. All at the same time... It is 24/7 and with chaos." - Illustrating why government actions often seem reactive rather than strategic compared to the private sector.
• At 0:22:22 - "On the fiscal side, it is something a bit abstract... if I maintain a fiscal adjustment, you will have an impact on interest rates... It is such a long path. You have an abstraction there." - Explaining the difficulty of convincing politicians to support austerity; benefits are distant, but the political pain of cutting budgets is immediate.
• At 0:24:48 - "We had the 'Nervousometer'... Someone said some nonsense about the Spending Cap, interest rates skyrocketed... And soon we calculated how much that would cost the Treasury." - Highlighting how market mechanisms provide immediate, quantitative feedback on political rhetoric.
• At 0:31:16 - "The gringo [foreign investor] is less subject to this day-to-day volatility... Brazil did not have such a big structural change... it is cheap to enter Brazil in Real, the stock market is super cheap and interest rates are high." - Explaining the "opportunity trade" for foreign investors who look at fundamentals rather than local political noise.
• At 0:44:28 - "When you have public accounts that don't bring you predictability... interest rates rise... This will punish the economy." - Explaining why fiscal responsibility isn't just an abstract political concept; it directly dictates the survival rate of companies.
• At 0:45:00 - "Those 700 billion is money that stopped going to companies... to be able to finance investment. In the past, all of this went to the Treasury." - A clear definition of the opportunity cost of high government debt (crowding out).
• At 0:47:56 - "A company paying interest of 18, 19, 20, 22%... there is no profit left." - Highlighting the mathematical reality of high interest rates; even healthy operational companies cannot sustain debt loads at these levels.
• At 1:00:01 - "The industry today is moving from a product focus to a client focus. What is the solution that works for you?" - Identifying the primary trend in modern finance: success is no longer defined by beating a benchmark, but by solving a client's specific problem.

Takeaways

• Translate abstract economics into personal impact: When advocating for fiscal responsibility, stop talking about "GDP" and start talking about "inflation" and "purchasing power." People (and politicians) only respond to economic policy when they understand how it affects their wallet immediately.
• Watch the "Nervousometer" for entry points: Use market overreactions to political noise as buying opportunities. Local investors often panic at headlines, while foreign investors look at the cold math (cheap currency + high yield), suggesting that contrarian bets during political chaos can be profitable.
• Analyze credit spreads against the base rate: In a high-interest environment, avoid companies with high debt loads, even if they are operationally strong. If a company is paying 20%+ in interest, their profit margins are likely being wiped out, making their debt risky regardless of the "yield" being offered.
• Leverage "Anchor" advantages: If you have significant capital or scale, do not settle for public market terms. Look for opportunities to structure "anchor operations" where you can negotiate better guarantees and rates directly with borrowers, rather than accepting the compressed spreads of the open market.
• Focus on the "Macro-Micro" Loop: Do not invest in a vacuum. Understand that a government's lack of fiscal credibility forces the Central Bank to hike rates, which directly crushes the cash flow of the companies in your stock portfolio. Assessing political risk is a necessary part of fundamental stock analysis.
• Adopt "Strategic Humility" in business: Don't try to build everything in-house. If you are a large incumbent, partner with specialized experts (ecosystems) rather than building mediocre internal solutions. If you are a specialist, seek distribution partners who need your expertise.
• Treat Crypto as a commodity, not a trade: For institutional portfolio construction, view assets like Bitcoin as diversification tools (commodities) to be held passively, rather than assets to be actively traded for alpha. Focus on low-cost, passive allocation vehicles like ETFs.