- Title: BRAZIL-RATINGS/S&P-REAX Brazil downgraded to junk rating by S&P, deepening woes
- Date: 10th September 2015
- Summary: RIO DE JANEIRO, BRAZIL (SEPTEMBER 10, 2015) (REUTERS) VARIOUS OF PEOPLE LOOKING AT A NEWSPAPER STAND THE MORNING AFTER STANDARD & POOR'S CUT BRAZIL'S SOVEREIGN RATING TO JUNK FRONT PAGES OF NEWSPAPERS HUNG UP FRONT PAGE OF VALOR NEWSPAPER READING (IN PORTUGUESE): "ROUSSEFF COMMITS TO FISCAL TARGETS" FRONT PAGE OF O GLOBO NEWSPAPER READING (IN PORTUGUESE): "DOWNGRADE AGGRAVATES THE CRISIS" FRONT OF O ESTADO DE SAO PAULO NEWSPAPER READING (IN PORTUGUESE): "BRAZIL LOSES ITS INVESTMENT GRADE; AGENCY CITES BUDGET DEFICIT" SAO PAULO, BRAZIL (SEPTEMBER 10, 2015) (REUTERS) EXTERIOR OF STOCK EXCHANGE SIGN ON EXTERIOR OF BRAZILIAN STOCK EXCHANGE VARIOUS OF MARKET GRAPHICS ON MONITORS INSIDE THE STOCK EXCHANGE GRAPHIC READING (IN PORTUGUESE): "DOWNGRADE FOR BRAZIL"
- Embargoed: 25th September 2015 13:00
- Location: Brazil
- Country: Brazil
- Topics: General
- Reuters ID: LVA42JOAQ5QEVXRFTU18PX3KGNKX
- Aspect Ratio: 16:9
- Story Text: Standard & Poor's downgraded Brazil's credit rating to junk grade on Wednesday (September 9), further hampering President Dilma Rousseff's efforts to regain investors' trust and pull Latin America's largest economy out of recession.
The faster-than-anticipated downgrade to BB-plus, the highest junk rating, from BBB-minus. will likely rock Brazilian financial markets on Thursday and will increase borrowing costs for the government and Brazilian companies.
Brazil first won its investment-grade credit rating in 2008 and the S&P downgrade is a major setback for Rousseff, a leftist struggling to kick-start the economy and shore up weak public finances.
It further sours market sentiment about the country and Brazilian assets will suffer because many investors will perceive higher risks.
S&P warned less than two months ago that a downgrade was possible but the unusually fast move underscores how quickly Brazil's economy and public finances have deteriorated since then. The outlook on the new rating remains negative, which means additional downgrades are possible in the near term.
The investment-grade rating was a key imprimatur that solidified Brazil's emergence as an economic power during a decade-long commodities boom that fizzled in recent years as the Chinese economy, Brazil's biggest export market and once ravenous for its raw materials, began slowing.
Further fallout from the downgrade will depend on how other major ratings agencies respond. While there will be some sharp falls in asset prices now, a flood of "forced selling" is not expected until a second agency also drops Brazil to junk status.
Fitch Ratings currently rates Brazil at BBB, two notches above investment grade, with a negative outlook. A senior analyst with the ratings firm said on Thursday that although there is a greater than 50 percent chance Brazil's credit rating will be downgraded, it still sees elements supporting Brazil's investment grade.
Moody's Investors Service downgraded Brazil less than a month ago to the brink of junk, but said its investment grade was safe for now.
S&P said on Wednesday its decision was based on the mounting political problems that have muddled economic policy.
These problems, S&P said, have been weighing on the government's "ability and willingness" to submit a 2016 budget consistent with the significant policy fixes Rousseff promised after she won re-election last year.
Finance Minister Joaquim Levy responded by saying the government would in the coming weeks send to Congress proposed savings measures to guarantee a primary budget surplus in 2016 - a reversal from late last month in which Rousseff proposed a budget that forecast a deficit.
"The tax adjustment is essential for growth. The downgrade is an evaluation of whether we are looking seriously enough at the adjustment, if society, if the government has understood the importance of our balancing the taxes, to achieve a budget surplus, which is necessary for people to regain confidence in Brazil," Levy said in a television interview on Wednesday night.
Planning Minister Nelson Barbosa said the government would continue to honour its financial commitments.
Still, the downgrade caught Rousseff's economic team by surprise. One person at the finance ministry, who requested anonymity, said it was too early to determine how it will affect the government's austerity efforts.
Levy insisted that the outlook is set to improve, but only if swift action is taken.
"After many years of rising inflation, if you look at the inflation outlook for 2016 it starts to go down, and by 2017 it is close to the target. If you act, you have results, if you stay in the middle, wondering if it will be too difficult, you may have results, but they may be even worse. We know what we need to do, the government has been transparent, and now we have to put it in action," said Levy.
Investors, meanwhile, speculated whether the move would serve as a wake-up call for the government and Congress to move faster, and in concert, or whether it would encourage Rousseff to change tack and boost spending once more to stimulate the economy.
Sao Paulo-based economist Pedro Paulo said the downgrade had been expected.
"We expected the downgrade, we just did not expect it so early. I think S&P announced the downgrade too early and it was a great surprise, but a large part of the markets have already been working with this downgrade in sight for some time," Paulo said.
"This could have been a positive event amid the very confusing scenario we are seeing in Brazil. The political scenario is perverse and there is no clarity with regards to whether tax adjustments, tax improvements, will go ahead. I think that the threat of the economic situation will force politicians to take action, it may not be action for the best, but there will be action at this point," Paulo added.
When Brazil first got the coveted investment-grade stamp from S&P, after decades of financial volatility, it was considered a star among developing nations.
Leveraging soaring export and tax revenues at the time, the ruling Workers' Party broadened generous social welfare programs and encouraged lending by public banks, fuelling a prolonged consumer boom. Combined, the measures lifted 40 million people out of poverty.
Once Rousseff took office in 2011, however, the economy began to slow down sharply and last quarter it officially entered a recession.
The economy has also been weighed down by a massive corruption scandal at state-run oil firm Petroleo Brasileiro SA , freezing many infrastructure investments.
Brazil's currency, the real, has lost a third of its value this year and the inflation rate has jumped to almost 10 percent.
The economic crises and the corruption scandal have both battered Rousseff's approval ratings, which are now in single digits, fuelling opposition calls for her resignation or impeachment.
Following the downgrade, some traders late on Wednesday said the currency could plunge to a 13-year low of 3.9 per dollar on Thursday. Others reviewed circuit breaker rules that could be triggered to stem volatility when local markets open.
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