Brazil faces daunting economic and financial challenges

Brazil faces an extraordinarily difficult moment. Even if politics were simple and policy unconstrained, the economy would confront painful challenges of adjustment to the correction of commodity prices and a probable slowdown in the credit expansion that supported the recovery of domestic demand in the past decade. 

On top of this, the country faces the need to make a substantial budgetary correction, which is likely to require some curtailment of popular entitlements that enjoy legal and in some cases constitutional protection. 

Inflationary pressures were met with an accommodative monetary stance, which set up the country for a potentially dangerous acceleration of inflation when the currency fell and regulated prices were corrected. 

"The decline in the government's political support, and absence of a substantially more promising replacement if the president were to leave office, forces investors to confront the possibility that the underlying fiscal adjustment may be long delayed", says Barclays.