Brazil's public debt in spotlight

According to an old accounting methodology, the public debt of Brazil has reached 70% of GDP. According to the measure, the debt ratio has risen sharply in the past 12-18 months.

For financial market participants, the most visible and pressing problem created by this witch's brew of external shocks, political crisis and policy slippage is the unsustainable growth in public debt  of Brazil. On its accounting, the government's gross debt reached roughly 65% of GDP in August. 

The net public debt is substantially lower and recently more stable than the gross debt. The main assets that are subtracted from gross debt to compute net debt are the government's debt claims on state owned banks (including most importantly the development bank BNDES) and international reserve assets of the central bank; these amount to roughly 10% and 20%, respectively, of GDP. 

"The interest earnings on these assets are far lower than the interest the government pays on its gross debt. And the recent stability of the net debt is largely related to the currency depreciation of the past several years.1 This will not provide indefinite relief from the underlying fiscal imbalance", argues Barclays.

Investors should not completely disregard the Brazilian government's financial assets, which provide some measure of budgetary relief. 

"But it is believed that the gross public debt is a more relevant summary statistic of the government's financial position. Until the underlying budgetary imbalance is addressed, its debt position is bound to worsen, no matter how it is measured", added Barclays.