For years, the business community has griped about high transaction costs in Brazil, a result of inefficient supply chains and high taxes — the so-called Brazil cost. Across the board, the business and finance community underscores the long-term positive effects of the Lava Jato investigation: graft needs to be cleaned up, and this could radically transform the way deals are done, say market players.

But in the short term, the uncertainty is having a tremendous impact. Combined with other factors, it has led to a “steep fall” in consumer confidence and contributed directly to plummeting construction and fixed investment, according to analysts at Capital Economics.

Jorge Piedrahita, chief executive of Torino Capital in New York, describes the short term effects as “massively negative”, compounding other troubles in the economy and making it difficult for Brazilian borrowers to access international capital markets.

“You have what I would call a triple tightening,” he tells LatinFinance. “You have on the one side, the central bank raising rates, and they want to regain credibility which they have lost over the last few years.

“On the other side, the sovereign, the federal government, is forced to do fiscal tightening, because it was spending too much. And lastly, the whole situation of Lava Jato is creating a credit tightening.”

The crisis comes after Latin America’s biggest economy pushed hard to differentiate itself from other emerging markets, says Walter Molano, chief economist at US-based BCP Securities. While “students of Brazil” are not surprised, less directly engaged, global investors “who really drank the Brazilian Kool-Aid” have been stunned by the developments, he says.

“Brazil had really sold itself as a country that had passed the bar, into the more developed world. They took themselves very seriously as a BRIC. It used companies like BNDES and Petrobras as standard bearers for the whole Brazilian image of new technology, sophisticated corporate governance and what we saw is that nothing has changed in Brazil.” LF