Analysis of Brazilian National Treasury Primary Auctions in the 2000s: an MMT interpretation

There are many factors to consider when discussing the impact of the stock of domestic public debt on long-term interest rates and the government´s ability to issue obligations at said rates. Primary factors include the stock of debt relative to GDP, as it is argued that large stocks of government domestic debt relative to GDP cause market participants to distrust the government´s ability to honor future payments, which in turn exerts upward pressure on the interest rate and may hinder the Government´s ability to finance itself. In this view, investors in public bonds would have bargaining power to “reject” some types of bonds and/or to “accept” buying them only at high interest rates. They would be “bond vigilantes” that could cause difficulties in rolling-over the debt and pressure interest rates to move higher. This “vigilance” would be reinforced by the International Rating Agencies, whose downgrades would increase the pressure on debt costs and, in the worst-case scenario, causing a flight of capital, especially in the case of a loss of the investment grade rating. This paper aims to analyze if these arguments can accurately describe Brazil’s experience in the 2000s, through an examination of the results of the Brazilian National Treasury (BNT) primary auctions. We analyze if there is evidence to support the hypothesis that the stock of Brazilian Domestic Public debt exerted any pressure on costs and influenced volume of new issues of debt by the Brazilian National Treasury auctions. Regard to the downgrade of Brazilian debt by international agencies, we examine if they exerted strong and persistent impacts on auctions in terms of volume, types, and interest rates on bonds. Finally, we briefly examine repurchase (“repo”) operations of the Brazilian Central Bank, looking for evidence of the coordination between BNT and BCB, which always maintains the interest rate target and, if necessary, drains the liquidity generated by Treasury operations. In order to explore the topics raised above, the paper is divided in four sections. Section 2 discusses the theoretical framework of the current analysis, based on the Functional Finance approach and Modern Monetary Theory. Section 3 presents the results of the Brazilian National Treasury auctions, including a detailed examination encompassing the period of downgrades by international rating agencies, and this relationship with the repo operations by the Brazilian Central Bank. Section 4 concludes the analysis.

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