Brazil, along with other mismanaged economies, has a currency that has been on a sharp, continual devaluation for decades. Once the currency falls near worthlessness, the Brazilian government issues a brand new currency with a different name and the same thing happens again, and again. When you have a chronically-failing currency like this, it is very expensive for the government to sell bonds because investors demand a very high interest rate to offset the falling currency. Rather than do the work to fix the economy and support the currency, the Brazilian government made a classic financial illiteracy mistake: mismatching assets and liabilities.
A year doesn’t pass by without a catastrophic currency mismatch making the news. What happens is someone borrows money in a foreign currency or makes an investment in a foreign currency, and then that currency moves the wrong way and they are financially-wiped out. This happens to individuals, companies, and governments, again and again. People take on an unhedged currency risk, for a relatively small financial gain, and think they will be the sole genius to avoid being crushed by an unfavorable currency move. (You can hedge currency risk, but it is not free, always accurate, and cannot be done for more than a year or two in the future).
Brazil issued their bonds denominated in U.S. dollars instead of their home currency. But in the last year, the Brazilian currency has plummeted by 39%, making the bond payments in dollars increasingly unaffordable. Investors are watching Brazil taking in tax revenue in a weakening currency but making debt payments in a strengthening currency. As a result, Brazilian bonds have been falling so low (yielding over 14%), that they are effectively predicting that these bonds will default. All because of financial illiteracy, a predictable and painful financial outcome for all who are involved, particularly the Brazilian residents.
If Brazil were to ask me, I’d advise them to default immediately so they don’t further deplete their current account and money that is needed to run the government during their current recession. The sooner they face reality, the sooner bond investors and Brazil can act appropriately and restructure these bonds to something affordable and sustainable.