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

Brazil’s central bank governor Gabriel Galipolo stated Tuesday that issuing debt in local currency provides flexibility for the sovereign but transfers risks to investors.

Speaking at an event in Sao Paulo, Galipolo said "the lender sets the interest rate, not the borrower." He added that Brazil’s debt being largely denominated in Brazilian reais does not eliminate opportunity costs for investors who finance it.

The central bank governor noted that the Brazilian real is one of the most liquid and traded currencies globally, with a daily turnover of $110 billion. He emphasized that Brazil’s foreign exchange market has its own particularities and idiosyncrasies that make it incomparable to other emerging countries.

Galipolo said Brazil’s international reserves are more than sufficient to cover the portion of debt indexed to currencies other than the real. He explained that holding long-term securities creates simultaneous exposure to both the exchange rate and the yield curve.

The governor acknowledged that currency shocks can stem from events involving a loss of credibility, and this perception of risk can persist for many years. He stated that a risk perception is clearly associated with a sequence of events related to the transmission of shocks and some degree of credibility.

Brazil conducts most of its borrowing in local currency.