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As clouds lift over Greece, Brazil is darkening

Greece and Brazil are both synonyms for economic dysfunction. So why do investors think Greece is becoming a respectable bet while Brazil remains a lousy one? Here’s a partial answer: the euro. Greece, a member of the European Monetary Union, works with a solid (if imperfect) currency. Brazil, on its own, doesn’t.

For bondholders, that’s a big deal. Greek government bonds returned 336 percent since May 2012 as Brazilian government bonds gained 24 percent, when measured in local currencies, according to the Bank of America Merrill Lynch index. Brazil’s real has depreciated 14 percent this year against the dollar, making it the worst performer among the 31 most traded currencies.

Investor skepticism also made the real the world’s least predictable currency. Its implied volatility, a measure of traders’ bets on how much its value will change day to day, jumped more than any other currency this year.

Crucial economic data tell a similar story. The gross domestic product of Greece is rising: It increased 0.75 percent in 2014, and is expected to rise 1.5 percent and 2.4 percent this year and next, according to economists surveyed by Bloomberg. Brazil’s real GDP fell or barely grew last year, and is likely to decline 0.5 percent in 2015 before rebounding 1.3 percent in 2016.

Consumer price inflation has disappeared in Greece. Prices dropped at a 1.38 percent rate in 2014, and are expected to fluctuate between deflation and slight inflation over the next two years. By contrast, Brazil keeps losing its fight to curb inflation, which is seen climbing to 7.5 percent from 6.33 percent this year, according to Bloomberg data.

Both countries have rising interest rates, but the market expects Greek rates to fall. That’s shown by economic forecasts of lower yields once a way is found to avert a Greek default. A default would force Greece to leave the euro, but the financial markets just don’t expect that to happen, because the result would be to impoverish citizens from cascading bankruptcies.

Greece’s economy is also emerging from a severe recession, which bodes well for Greek assets, the opposite of Brazil’s outlook. So while Brazil gets worse, Greece rallies when the risk of default abates.

The tale of two economies shows how Greece gains from the European Union as Brazil suffers from being alone: Greece pays the minuscule European Central Bank rate of 0.05 percent while the rate of interest the Bank of Brazil pays on real deposits is 13.20 percent. In the market for long-term debt, benchmark 10- year bonds have a current yield of 11.83 percent, still less than the 12.87 percent yield on Brazil’s real-denominated debt.

Even with anxiety at a fever pitch over Greece’s future as a euro-zone member, the withdrawal of corporate deposits from banks in Greece is a shadow of what it was in 2012. When the Syriza party came to power in January with a promise to repudiate about 320 billion euros of debt, foreign deposits declined 13.3 percent during the month compared with the same period last year. President Alexis Tsipris has since scaled back his government’s demands. During the height of the euro crisis three years ago, the flight of corporate funds totaled 30 percent in the corresponding one-month period.

Stocks of Greek companies are doing reasonably well. Not so their Brazilian counterparts. More than two-thirds of the shares in the Bovespa index are trading below their global peers, on a forward-looking price-to-earnings basis. By contrast, more than half the companies in the Athens Stock Exchange General Index still are valued more than their competitors worldwide.

While Greece has the benefit of stability guaranteed by its membership in the EU, Brazil has no such economic foundation. Brazil is sliding into a recession, scorched by drought, inflation, deficits and political instability. For a country that gets more than 75 percent of its electrical power from water, the double whammy of some of the highest interest rates in the world and a weakening currency during a recession should make any investor skittish, confronting the risk that rates continue to climb as the currency depreciates.

Brazil is on its own. Greece isn’t.

Matthew Winkler, Editor-in-Chief Emeritus of Bloomberg News, writes about markets.

© 2015, Bloomberg News