Halfway through his third (nonconsecutive) term, Brazilian President Luiz Inácio Lula da Silva is dealing with significant economic trouble. Although markets have recovered somewhat in recent weeks, at the peak of the market turmoil, in early January, the real had lost nearly 15% of its value against the dollar compared to early October, while Brazil’s main stock index, the Ibovespa, lost 10 percent of its value over the same period. The trigger for the most recent meltdown, in mid-December, was the announcement of a fiscal adjustment package that fell short of expectations.

While Latin America is often associated with economic upheaval, the situation in Brazil is not a typical emerging-market crisis. Brazil’s sovereign debt is overwhelmingly in local currency, and although its current account deficit has widened recently, it has plenty of foreign reserves. It is thus not particularly vulnerable to running out of dollars, and exchange range fluctuations do not have an immediate impact on its debt burden.

Halfway through his third (nonconsecutive) term, Brazilian President Luiz Inácio Lula da Silva is dealing with significant economic trouble. Although markets have recovered somewhat in recent weeks, at the peak of the market turmoil, in early January, the real had lost nearly 15% of its value against the dollar compared to early October, while Brazil’s main stock index, the Ibovespa, lost 10 percent of its value over the same period. The trigger for the most recent meltdown, in mid-December, was the announcement of a fiscal adjustment package that fell short of expectations.

While Latin America is often associated with economic upheaval, the situation in Brazil is not a typical emerging-market crisis. Brazil’s sovereign debt is overwhelmingly in local currency, and although its current account deficit has widened recently, it has plenty of foreign reserves. It is thus not particularly vulnerable to running out of dollars, and exchange range fluctuations do not have an immediate impact on its debt burden.

Instead, what we are seeing are the fruits of careless fiscal policy—fruits that foreshadow what a slow-burning fiscal crisis might look like in an advanced economy such as the United States.

Brazil’s ratio of public debt to its GDP has been trending up over the years—from a little more than 50 percent a decade ago to close to 80........

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