Pablo Murad

The bill came fast

· 5 min read · #politics · #brazil · #economy · #markets · #elections

Lula won a fourth term on Sunday. On Monday the Ibovespa fell 13.88%, the dollar jumped 8.21% and R$ 734 billion vanished. Behind the crash: a growing debt, R$ 1.5 trillion a year in interest and a market that no longer believes the promises.

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On Sunday night, Lula won his fourth term with 51.79% of the valid votes. On Monday morning, the market sent the bill.

The Ibovespa closed October 26 down 13.88%, at 176,608 points. At the worst moment of the day it was down more than 17%, and B3 had to stop trading for half an hour, the first circuit breaker since March 2020, when the world was shutting down for Covid. The dollar jumped 8.21% and closed at R$ 5.40. About R$ 734 billion in market value disappeared in a single session. The only day in the history of the index that was worse was September 10, 1998, in the middle of the Russian crisis.

For a market, that reads like a verdict.

It wasn't just a bet going wrong #

The easy explanation, and you'll hear it a lot this week, is that the market had bet on Flávio Bolsonaro and simply had to undo the bet. There's some truth to it. When Flávio finished first in the first round, against every poll, the Ibovespa jumped 7.7% in one day and the dollar fell below R$ 5. Part of Monday's drop was that rally being handed back.

But only part. Look at the numbers:

Ibovespa, closing points

Oct 2 (before 1st round) ###################################### ~192,100
Oct 5 (after 1st round)  ######################################## 206,912
Oct 23 (last Friday)     ######################################## 205,083
Oct 26 (after runoff)    ################################## 176,608

Source: B3, via InfoMoney and Eu Quero Investir. Oct 2 derived from the Oct 5 close and its 7.70% gain.

Before anyone was dreaming of a change in government, the index was around 192 thousand points. It closed Monday at 176 thousand, roughly 8% below that. So the market ended below where it started, because it's now charging Brazil something it wasn't charging before: a bigger risk premium for four more years of the same.

The real fear has a name: the debt #

Brazil's gross public debt closed 2025 at 78.7% of GDP. It's grown for three years in a row, about seven points since this government took office. The country spends something like R$ 1.5 trillion a year on interest alone, between 7.9% and 8.9% of GDP. Italy, the European poster child for debt, spends around 4%.

Here's how that turns into a crash. When investors believe the debt is going to keep growing, they ask for higher interest to keep lending to the government. Higher interest makes the debt grow faster. The dollar goes up because money leaves. And Brazilian companies are suddenly worth less, because their future profits are now discounted at a much higher rate and their costs, in dollars, just went up.

On Monday, the futures market spelled it out. Contracts for 2029 and beyond jumped about 2.6 percentage points in a single day, to around 15.2% a year. That's the price the market now puts on lending to Brazil for the next decade. It's also the rate that, sooner or later, shows up in your mortgage, your car loan and the credit card your cousin is paying off in twelve installments.

Running to the dollar #

When in doubt, capital leaves emerging markets and hides in dollars. That's why the exchange rate moved so violently in one day. In early trading the dollar passed R$ 5.60 before settling at R$ 5.40.

Dollar, closing price in reais

Oct 5 (after 1st round)  ##################################### 5.00
Oct 23 (last Friday)     ##################################### 4.99
Oct 26 (after runoff)    ######################################## 5.40

Source: InfoMoney, Times Brasil

In New York, the main Brazil ETF, EWZ, fell more than 27% before the opening. Brazil's five-year CDS, the price of insurance against the country not paying its debt, rose 26% in a day, to its highest level since July 2025. That's how the rest of the world reads a Brazilian election.

Who pays #

It's tempting to think a stock market crash is a rich people's problem. The ten richest Brazilians did lose about US$ 15 billion on Monday, and I'm not going to cry for them. The bill lands somewhere else.

A more expensive dollar means more expensive fuel, wheat, medicine, phones and anything with an imported part, which in Brazil is almost everything. Higher long-term interest means more expensive credit for families and small businesses, at a time when Serasa already counts more than 81 million Brazilians behind on their bills. And it means less room for the Central Bank to cut the Selic. William Jackson, chief emerging markets economist at Capital Economics, said on Monday that the result frustrates hopes for reforms and makes the rate cuts expected for this year less likely.

Then there are the pensions. Pension funds, the FGTS and every retirement plan that holds Brazilian stocks and long bonds woke up poorer on Monday. Nobody voted for that, but everybody will feel it.

The banks, and the state's bank #

The sell-off hit hardest where the government's hand is heaviest. Banco do Brasil, controlled by the federal government, fell 29.33% in a day. Bradesco lost 21.7%, Itaú 13.66%. B3 itself, the company that runs the exchange, fell 36%. Companies that depend on cheap credit and consumers with money in their pockets got destroyed: Magazine Luiza fell 58%, Hapvida 55%, C&A 47%.

Petrobras fell 8.18%, and its CEO, Magda Chambriard, called it a "speculative movement" that doesn't reflect the company's fundamentals. Maybe. But the market has seen Brazilian state companies used as instruments of government policy before, and it remembers.

The promises #

The government's answer came fast too. The Finance Minister, Dario Durigan, said the government will change the law, or even the Constitution if necessary, to aim for the center of the fiscal target this year. That's the kind of sentence that's supposed to calm markets.

I've heard it before. The fiscal framework was itself a promise. Since then, the target has been loosened, revenue has been squeezed out of record tax collection and an IOF hike that Congress had to fight, and the debt kept climbing anyway. Investors aren't asking for another speech. Thomas Haugaard, a portfolio manager at Janus Henderson, said what they want is simple: a credible economic team and a fiscal plan with numbers. Until then, every promise gets priced as a maybe.

The bill came fast #

Elections have consequences. Usually they take months to show up in the numbers. This time, it took one night.

Maybe some of Monday's panic reverses. Markets overshoot, and a few calm weeks and a serious economic team could bring part of it back. But the problem underneath doesn't go away with one good speech: a state that spends more than it collects, a debt that grows every year, and a government that has spent three years asking for patience. On Monday, the people who lend money to Brazil answered.

They didn't like what they heard.

Sources #