S&P knocks Brazil’s credit rating to junk

BRAZILIAN bonds fell to a record low and Petroleo Brasileiro (Petrobras) tumbled in Germany after Standard & Poor’s ( S&P) knocked the nation’s credit rating to junk, deepening outflows from this year’s worst-performing Brics market.

The S&P cut, to BB+, which carried a negative outlook, sent yields on Brazil’s $4.3 billion (R58.75bn) of 4.25 percent bonds due in January 2025 climbing 18 basis points to 5.71 percent in London, the highest since the notes were sold two years ago. American depository receipts of Petrobras lost as much as 8.1 percent in Frankfurt. GAM UK and NN Investment Partners said the real, which slid 30 percent this year, might drop past 4 (R14) per dollar, 5.5 percent weaker than yesterday’s closing price.

The downgrade makes S&P the first rating agency to bring Brazil back into speculative territory after seven years at investment grade. The move is a reflection of the country’s worsening outlook as President Dilma Rousseff grapples with above-target inflation, the highest interest rates since 2006, a corruption scandal in state-run Petrobras and the deepest recession in 25 years.

“This is only the beginning of a very difficult few years for Brazil,” said Per Hammarlund, the chief emerging markets strategist at SEB in Stockholm, who expects the real to weaken at least 2 percent tomorrow. If Moody’s Investors Service follow in the coming months with a downgrade, “it will be carnage”, he said.

Fitch Ratings, in which Brazil is two steps above junk, pointed to risks to its rating in London this week. Moody’s ranks Brazil at Baa3, its lowest investment grade. S&P’s new score brings Brazil on a par with Hungary, Russia, Bulgaria and Indonesia.

S&P’s step also raised the spectre that other nations in the Brics grouping, particularly South Africa, could be under threat of downgrades, with Commerzbank saying Africa’s most-industrialised country may be next in line.

Russia was already reduced to junk by S&P and Moody’s this year. Brazil and South Africa are vulnerable to a slowdown in China because the world’s second-largest economy is their biggest export market.

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is probably the biggest risk for emerging markets as a whole,” said Simon Quijano-Evans, the chief emerging market strategist at Commerzbank in London. “Market volatility is set to remain, with the onus now being on China to react with new policy measures,” he said.

The real has tumbled more than any of the 23 developingcountry currencies.

The downgrade rekindles speculation about finance minister Joaquim Levy’s future. His mandate was to shore up Brazil’s finances and avert the downgrade. – Bloomberg