Flávio Bolsonaro’s early success in Brazil’s presidential race sparked such euphoria that investors risk overlooking a debt problem running through every corner of the nation’s economy.

The right-winger’s showing in the first round of the election catapulted assets higher as traders bet that double-digit interest rates would soon plummet. The mood shift was so significant that Cosan SA, a highly levered conglomerate, started to rethink a plan to sell off assets.

But Brazil’s fiscal issues run deep — just about everywhere you look, debt is piling up and borrowers are flailing. Household delinquencies are at an all-time high, as is the number of companies behind on their payments. Farmers, the engine behind Latin America’s largest economy, are defaulting at a record clip. Government debt is equivalent to more than 80% of GDP.

It all amounts to a credit problem too severe for either candidate to ignore, and too complex to be solved overnight.

“Next year should be one of getting the house in order,” said Rafael Nogueira, a partner at Chimera Capital, which focuses on distressed investments. “Even if interest rates fall very quickly, we’re going to be dealing with the hangover for at least another two years.”The issue is clearly a concern for leftist President Luiz Inácio Lula da Silva, vying for his fourth term. This week, in bids to boost his odds, he proposed forgiving 12.6 billion reais ($2.5 billion) of obligations owed by so-called micro-entrepreneurs and announced legislation to provide free public transportation across the country on weekends.

According to two recent polls, the candidates now appear locked in a tie ahead of a runoff on Oct. 25. The tightening has weighed on local assets this week, sending investors rushing for hedges.

Bolsonaro has also seized on the credit problem, criticizing Lula’s debt renegotiation program and using ads to put a spotlight on recent high-profile corporate defaults, such as the collapse of retailer Casas Bahia.

His plan includes creating a bailout fund for indebted households and companies, backed by cash from oil auctions and asset sales. State-owned bank Caixa Econômica Federal would buy debts and refinance them at lower rates while providing grace periods.

Similar initiatives have helped to keep credit flowing and provide short-term relief to borrowers, but they haven’t reversed the rise in delinquencies. Changes that nudge the direction of lower rates are key to Brazil emerging from its debt woes, said Victor Tofolo, head of credit at Bradesco Asset Management.

“We saw a lot of fiscal stimulus throughout this year,” Tofolo said. “A fiscal adjustment has its pains in the short term, but you have the possibility of lower interest rates.”Both Lula and Bolsonaro’s plans suggest that they’re queasy about that short-term pain, given that neither seems inclined to do what the market truly wants: cut spending outright.

Instead, they’re pledging to stabilize Brazil’s debt load without sacrificing social spending programs that are popular with voters. In fact, their agendas tout stimulus and debt renegotiation programs that could strain the national balance sheet even further.

Each man has vowed to let pension payments rise in step with the minimum wage and increase some benefits at a pace faster than inflation. Bolsonaro promised to bolster a program for low-income Brazilians and voted to support a law that shortens the standard workweek.

Such measures indicate more spending and higher consumer demand, making it more of an uphill battle for the government to trim debt and for the central bank to bring rates down.

Still, investors and corporate executives see Bolsonaro as more likely to pursue a fiscal adjustment. He has backed generous benefit programs, but has also pledged to slash spending, bureaucracy and taxes, with adviser Daniella Marques taking inspiration from Javier Milei’s “chainsaw” agenda in Argentina.

“There’s a natural optimism” about fiscal reform, said Otávio França, managing partner at Exon Partners, a financial advisory firm that focuses on corporate restructuring. “But there’s a lot of debt in various sectors, and that won’t change from one day to the next.”França, a former executive at advisory firm Alvarez & Marsal, started Exon last year as he found that more companies were looking to rework their debt.

A record 9.3 million companies were delinquent in August, with overdue debts totaling 244 billion reais, according to data from credit bureau Serasa Experian. Brazil’s biggest-ever out-of-court restructurings — biofuels giant Raizen SA and petrochemical producer Braskem SA — kicked off this year. Farm-loan delinquencies are at a 15-year high as weaker grain margins and weather shocks add to the weight of high borrowing costs.

But it’s not just companies. Household consumption fell 0.4% in the second quarter, while data from July and August point to further slowing. Financial-system delinquencies hit a record 5% in August, largely driven by overdue loans to individuals.

“We’re heading into 2027 with a significant legacy of leverage among households and companies,” said Camila Abdelmalack, chief economist at Serasa Experian. “That will need to be addressed with a great deal of attention and strategy.”