Brazil downgraded to junk rating by S&P, deepening woes

Wed Sep 9, 2015 11:27pm EDT
 
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By Walter Brandimarte

RIO DE JANEIRO (Reuters) - Standard & Poor's downgraded Brazil's credit rating to junk grade on Wednesday, 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 from investment grade 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 cut Brazil's rating to BB-plus, the highest junk rating, from BBB-minus.

It 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.   Continued...

 
A view shows the Standard & Poor's building in New York's financial district February 5, 2013. REUTERS/Brendan McDermid