But the effects of the developments in Brazil will also have major impacts on regional and other developing economies, and the markets in the South as well as the North. Even before the Real devaluation, the general expectation was that Brazil would face a recession. Capital markets elsewhere have so far not been affected, but the bond markets have seen a widening of quality spreads. These spreads had risen after the Russian crisis last summer, but had begun to come down with the US Federal Reserve's easing and cuts in interest rates in three instalments. But the spreads still remain high - with the spread between BAA corporate ratings and US Treasuries now at 218 basis points.
Liquidity is also scarce in credit markets.
In Brazil, with the devaluation, there would be a higher burden of fiscal adjustment, and reducing the fiscal deficits would become a higher priority in terms of the orthodox economics. It is possible, as Brazilian policy-makers hope, the economy would stabilise and the interest rates might come down. But it is an 'if', and if it does not, the recession could worsen, in turn increasing the fiscal problems. It is the kind of dilemma that all developing economies face - reconciling their external sectors and policies with growth in the domestic sector. It is easy for the IMF or the US Treasury to blame the Brazilian Congress or the States, but Washington cannot use the US Congressional actions and inactions to justify its inactions, and blame Brazilian democracy.