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Photographer: Simon Dawson/Bloomberg Photographer: Simon Dawson/Bloomberg

Brazil’s incoming Finance Minister Nelson Barbosa pledged to maintain fiscal discipline and sustain economic policies after financial markets hit new lows Friday on the departure of Joaquim Levy.

Barbosa will be sworn in on Monday as finance minister, inheriting a deepening economic crisis marred by political turmoil, eroding fiscal accounts and investor skepticism.

The real extended losses in late-afternoon trading Friday and the benchmark Ibovespa stock index closed at more than a six-year low, as investors fear Barbosa will adopt looser fiscal policy. Brazil’s risk perception, as measured by five-year credit-default swaps, rose to the highest level since September.

"Levy leaving is a clear negative," said Phillip Blackwood, managing partner at EM Quest Capital LLP.

Barbosa now faces the daunting challenge of convincing investors and rating companies that he has the political support and personal conviction needed to shore up fiscal accounts. While Rousseff says she backs measures to raise taxes and cut spending, her allies are reluctant to tighten the belt amid surging unemployment and shrinking wages.

Speaking to reporters soon after his new appointment, Barbosa said he would continue to push for the kind of austerity programs that Levy championed. But in a sign that he may be more willing than his predecessor to open purse strings, Barbosa said some industries could receive government subsidies.

Austerity Plan

Levy had trouble persuading Congress and Rousseff’s cabinet to adopt large parts of his austerity plan, which he said was key to reviving investor confidence and stimulating growth. He had threatened before to resign, raising concern that would lead to a credit downgrading.

On Dec. 16, those concerns were obviated when Fitch Ratings cut Brazil’s credit rating to junk status, following Standard & Poor’s, which in September removed the investment grade it awarded the country in 2008.

Analysts said Barbosa is associated with less fiscal discipline and enjoys Rousseff’s support for a lower budget surplus before interest payments.

"I’m not saying Barbosa will be fiscally irresponsible, but probably he does not have the keen sense of urgency that the authorities need to turn around the fiscal very quickly,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc, said before the formal announcement of the cabinet change.

Barbosa tried to dispel that view on Friday.

"Today our biggest challenge is fiscal, which is totally up to the Brazilian government to solve," he told reporters. "We’re focused on resolving our current problems."

Levy’s Departure

Levy’s departure crowns a dramatic set of events in recent months for Latin America’s largest economy, including the start of impeachment proceedings against Rousseff and the arrest of high-level corporate executives in its largest corruption scandal ever. The country, once a darling of Wall Street with more than seven percent annual growth, has been unable to get back on its feet.

Gross domestic product will shrink 3.5 percent this year and 2.5 percent next, marking Brazil’s longest recession since the Great Depression, according to analysts surveyed by Bloomberg. Unemployment will continue to rise through at least 2017 and inflation will persist above the government’s target of 4.5 percent, according to their forecasts.

Many investors are now asking themselves whether Barbosa can steer Brazil out of the recession when Levy, an experienced, University of Chicago-trained economist, could not. With Rousseff’s disapproval rating at a record high and Congress rattled by scandals and impeachment proceedings, the challenge is as political as it is economic.

While Levy succeeded in winning congressional approval for some tax increases and spending cuts when he started, the economic contraction has since sapped fiscal revenue and caused the budget gap to expand.

In many ways, Levy’s task was daunting from the moment he took office. Not only was the country already sliding into recession -- the result of plunging prices for Brazil’s commodity exports and four years of Rousseff’s interventionist policies -- but a corruption scandal emanating from the state-run oil giant was spreading fast.

It has since paralyzed some of the country’s biggest companies, deepening the economic slowdown, and more importantly, soured relations between Congress and the president.

— With assistance by Ethan Bronner, Carla Simoes, and Robert Jameson

( Updates with Barbosa's comments in first paragraph. )