Congress's continued resistance to a host of critical fiscal reforms, along with a burst of bad regional economic news, ravaged Brazil's currency and unsettled once optimistic international investors last week.
Congress and President Fernando Henrique Cardoso remain deadlocked over the reforms, intended to close the $67 billion budget deficit that has weighed down this nation of 167 million.
The legislative inaction in Brazil, which boasts the world's eighth largest economy, has startled foreign investors, who have become increasingly worried that lawmakers will not pass any significant budget-cutting measures this year.
"They'll probably pass something, but it's clear that the president will have to make a lot of concessions, and they'll probably end up being bad concessions," said Paulo Vieira da Cunha, a senior vice president at Lehman Brothers Inc., who pays close attention to Brazil.
Brazil's currency, the real, nose-dived by as much as 6 percent this past week, falling further than it has since early March, two months after the government devalued the currency. The real reached almost two to the dollar, although by Friday it had begun to regain a bit of its value.
The wobbly real comes coupled with news of a debt crisis in Ecuador and the possibility that 12 Argentine banks will see their long-term debt ratings fall.
But much of the pressure on Brazil is self-inflicted, as its legislature appears to be in no hurry to overhaul the tax system, chop retirement benefit expenditures or shackle state governments with spending limits.
At the same time, polls show that Cardoso's popularity, weakened since the devaluation, continues to wilt, despite signs the country is emerging from a recession.
The president's shrinking popularity makes it that much more difficult for him to squeeze votes out of Congress, many of whose members plan to run for state and local office next year and are concerned about alienating key constituencies.
"In January, they were under the gun, and they didn't want to be blamed if Brazil fell apart," so Congress passed some reforms, said David Fleischer, a political scientist at the University of Brasilia. "Then they went home to their constituencies and they got an earful. Even members of the president's own party are distancing themselves from him. Everybody's getting ready for the municipal elections next year."
The fragility of Cardoso's four-party coalition has sharpened investors' and analysts' concerns that the president is closer than ever to losing his base in Brazil's notoriously fractious legislature. That impression has only added to the increasing sense of political drift that has gripped the country.
"There's nobody in charge," said Johns Hopkins University political scientist Riordan Roett, who has studied Brazil for three decades. "The president has been unable to build a stable political coalition, and now it looks like the emperor has no clothes."
Investors have maintained confidence in Brazil for much of the year. That confidence appeared to pay off, as inflation rates, expected to climb this year, will reach only 8 percent. The economy, once expected to decline by 3 or 4 percent, could either remain flat or to contract by as little as 1 percent.
But events of the past week were especially jarring to investors, who witnessed Congress and Cardoso negotiate with thousands of farmers, who would like the government to write off billions in debt.
In addition, Congress, which opened its session early this month, has yet to take any substantive steps regarding the reforms Cardoso is pushing for. Already some investment firms are either urging clients to pull back commitments to Brazil or to exit altogether, at least for now.
The crisis has sent top officials at the Central Bank scrambling to assure investors that Congress will indeed pass key fiscal reforms and that economic recovery is on track. Bank officials went so far last week as to say that Brazil will not accept the next installment--$4.3 billion--of its $41.5 billion loan package from the International Monetary Fund.