By Jamie McGeever and Marcela Ayres
BRASILIA, Sept 22 (Reuters) - Brazil's recent market volatility and a surge in borrowing costs are a "warning" that the government must rein in spending and get back on a more stable fiscal footing, the country's top treasury official told Reuters.
While appearing relaxed and insisting there were no problems funding a crisis-fueled record deficit, Treasury Secretary Bruno Funchal said the government needed to get its fiscal and economic reform agenda back on track next year.
"We have no room for error. The (market) prices reflect the situation. It is a warning," Funchal said in an interview with Reuters over video conference late on Monday.
Brazilian interest rate curves have steepened sharply in recent weeks, as traders price in official rates being kept at a record low 2.00% for a long time while growing fiscal uncertainty has pushed up longer-term yields.
The shift, which reflects higher risk premiums demanded from investors lending to the Treasury, has driven some parts of the curve to its steepest since the historical highs hit in May and close to exceeding even those levels.
"It is a consequence of our situation. The fiscal side is under a lot of pressure, and...creates certain instability," Funchal said.
Huge spending to cushion the economic blow from the pandemic has pushed the budget deficit and public debt to record levels. Economy Minister Paulo Guedes insists that emergency spending will end this year but President Jair Bolsonaro, whose approval ratings have risen as a result, appears more willing to keep the taps open.
The volatility and surge in premiums demanded by investors have seen the Treasury fail to sell all the bonds offered at several floating rate debt auctions in recent months. On Friday, it sold barely a fifth of the short-term notes on offer.
Treasury has played this down, saying some auctions attract stronger demand than others depending on market conditions and the amount on offer. It notes that with the central bank's benchmark Selic interest rate at a record low 2.00%, the average cost of funding Brazil's federal debt has never been lower.
Funchal said there have been no discussions with central bank president Roberto Campos Neto about intervening in the market, buying bonds to bring down longer-term yields and flatten the curve.
"I haven't had a conversation with Roberto. We work together to reduce this (market) pressure by advancing an agenda (of reforms). But regarding the purchase of securities, we haven't spoken yet," Funchal said.
The central bank was granted emergency powers earlier this year to buy public debt but has yet to do so. Policymakers have said any bond purchases will address market dislocation and ensure the market functions smoothly.
The Treasury has to refinance 835 billion ($154 bln) of debt maturing in the next 12 months, a fifth of Brazil's total. In calendar year 2021, almost 900 billion reais worth needs refinanced.
Funchal said the Treasury weighs up the "trade off" at every auction between issuing short-term securities, which is cheaper but shortens the debt profile, and issuing longer-dated bonds which is more expensive but lengthens the debt profile.
($1 = 5.42 reais)
Brazil interest rate curvehttps://tmsnrt.rs/2ZSzZIP
(Reporting by Jamie McGeever and Marcela Ayres; Editing by Sam Holmes)
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