Blog post

Brazil can learn from Spain: don't delay adjustment

Brazil’s economic crisis has much in common with Spain’s crisis from 2009 – 2012. The IMF and the global community must work together to ensure a stab

Publishing date
11 May 2016

This blog post was originally published in the Financial Times.


Brazil’s economy and politics have long been playing with fire. Now the rest of the world risks getting burnt by waiting for the crisis to be addressed domestically. The country could learn a lot from Spain’s 2012 rescue package.

Brazil’s is one of the largest emerging market economies, close to the size of Germany’s. Its GDP is $3.2tn in purchasing power parity terms. It is the largest economy in South America, with huge knock-on effects on other countries in the region. It is also very financially open, making up nearly 7 per cent of the MSCI Emerging Markets equities index; its weight is even bigger in EM debt markets.

Brazil’s systemic importance has already been shown by the impact of its 2001 crisis on other EMs. Given this, one wonders where the IMF and G20 have been during the past few months. Brazil has not even been mentioned in any recent G20 communiqués. As for the IMF, it has offered only low-key warning signals. Yet Brazil’s economy is really crying out for an IMF bailout.

The fact that there has been no effective government in Brasília since congress voted on April 17 to impeach Dilma Rousseff, the president, should not serve as an excuse. Brazil has been agonising for at least two years. Some may argue that a leftist government such as Rousseff’s cannot be expected to approach the IMF for help. However, Spain’s recent experience with its own painful bailout shows that, when push comes to shove, survival becomes key.

No matter how unpopular the IMF might be in Brazil, there are always ways to tone down the IMF’s ownership of a stabilisation programme. Spanish authorities did their utmost to differentiate their programme from those of other southern European countries. Presentation is important, and Brazil’s new government should find ways to save face by pushing for the ownership of a stabilisation programme. The crucial issue is to act quickly and for the programme to be as credible as possible.

Brazil’s situation today has much in common with that of Spain between 2009 and 2012, when a €100bn rescue package was finally granted. Brazil is running twin fiscal and current account deficits and suffering from the deepest economic recession in a century. This was also the case in Spain.

At least some of the underlying causes of the crises in Brazil and Spain are similar, too. Both countries went through ultimately unsustainable booms. In Spain’s case, it was a housing boom that collapsed in 2008, leaving huge scars both in the labour market and in the banking system. Brazil’s economy, in turn, benefited from a protracted commodity price boom, which left the country exposed to capital flow reversals.

The response to the unavoidable end of the boom years was massive fiscal expansion in both countries. Spain took its fiscal balance from a surplus of 2 per cent of GDP to a deficit of more than 10 per cent and kept it around 10 per cent for four years. Similarly, Brazil expanded its deficit from under 3 per cent to more than 10 per cent.

Spain’s large deficit, combined with unresolved problems in the banking system and labour markets, eventually led to a loss in policy credibility and a sharp increase in sovereign risk. Such high sovereign risk, for a country that was very dependent on external financing, resulted in the drying up of lending, inflicting severe damage on the corporate sector and on the economy as a whole.

In such a situation, it becomes imperative to quickly restore policy credibility. In Spain the limited financial assistance programme achieved exactly this: it helped implement a number of key reforms, especially in the labour market and the banking system, while providing much-needed fiscal adjustment. In addition, abundant and cheap liquidity provided by the European Central Bank helped to turn around the economy, which, although still recovering from the crisis, is now one of the fastest growing of the eurozone.

Until it accepted its rescue package, the Spanish government was as much in denial as that of Brazil. The key was that the rest of the world, and in particular eurozone governments, kept on pushing for a programme until they made it possible.

Based on the Spanish experience, we argue that Brazil must recognize its situation as soon as possible. It certainly cannot afford to keep its deficits at 10 per cent for another three years. It must implement a credible adjustment programme.

The IMF should stand ready to support Brazil through preferential funding rates and a well-designed programme. The international community, especially the G20, should make clear Brazil’s importance to the global economy, so that support is expected. As for Brazil, thinking about how generally proud Spaniards accepted their “medicine” should help them disregard the stigma that IMF programmes are said to bring, no matter how difficult this might look at first sight. There is no time to lose.

Figure 1

Source: Bloomberg, Natixis


Figure 2

Source: Bloomberg, Natixis


Figure 3

Source: Bloomberg, Natixis


Note: There was a factual mistake in the original version of this post. It was indicated that Spain's 2012 rescue package was from the IMF, which is incorrect. This has now been corrected.

About the authors

  • Guntram B. Wolff

    Guntram Wolff was the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). From 2012-16, he was a member of the French prime minister's Conseil d'Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

  • Alicia García-Herrero

    Alicia García Herrero is a Senior fellow at Bruegel.

    She is the Chief Economist for Asia Pacific at French investment bank Natixis, based in Hong Kong and is an independent Board Member of AGEAS insurance group. Alicia also serves as a non-resident Senior fellow at the East Asian Institute (EAI) of the National University Singapore (NUS). Alicia is also Adjunct Professor at the Hong Kong University of Science and Technology (HKUST). Finally, Alicia is a Member of the Council of the Focused Ultrasound Foundation (FUF), a Member of the Board of the Center for Asia-Pacific Resilience and Innovation (CAPRI), a member of the Council of Advisors on Economic Affairs to the Spanish Government, a member of the Advisory Board of the Berlin-based Mercator Institute for China Studies (MERICS) and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR).

    In previous years, Alicia held the following positions: Chief Economist for Emerging Markets at Banco Bilbao Vizcaya Argentaria (BBVA), Member of the Asian Research Program at the Bank of International Settlements (BIS), Head of the International Economy Division of the Bank of Spain, Member of the Counsel to the Executive Board of the European Central Bank, Head of Emerging Economies at the Research Department at Banco Santander, and Economist at the International Monetary Fund. As regards her academic career, Alicia has served as visiting Professor at John Hopkins University (SAIS program), China Europe International Business School (CEIBS) and Carlos III University. 

    Alicia holds a PhD in Economics from George Washington University and has published extensively in refereed journals and books (see her publications in ResearchGate, Google Scholar, SSRN or REPEC). Alicia is very active in international media (such as BBC, Bloomberg, CNBC  and CNN) as well as social media (LinkedIn and Twitter). As a recognition of her thought leadership, Alicia was included in the TOP Voices in Economy and Finance by LinkedIn in 2017 and #6 Top Social Media leader by Refinitiv in 2020.

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