Brazil stripped of investment grade rating

Fitch cuts country’s credit to junk status

BRASILIA: Brazil l ost its coveted investment-grade rating on Wednesday after Fitch Ratings became the second credit agency to downgrade the country’s debt to junk status, citing concerns about an economic and political crisis threatening to topple President Dilma Rousseff.

Fitch downgraded Brazil to BB+ with a negative outlook less than 24 hours after the left-leaning Rousseff moved to loosen next year’s budget targets in a bid to safeguard spending for welfare programs.

The decision undercut her orthodox finance minister, Joaquim Levy who staked his reputation on an austerity agenda that has now stalled in Congress.

Levy blamed the government’s abandonment of targets needed to cut debt for Fitch’s decision.

“Obviously the goal of zero (debt reduction) is very bad and resulted in the downgrade,” he told Band News TV.

The real currency and dollar-denominated bonds tumbled amid forced selling after the downgrade, which came just three months after Standard & Poor’s cut Brazil’s rating to junk, further clouding the outlook for an economy reeling from its sharpest downturn in a quarter-century.

Investors barred from owning junk bonds could dispose of about $20 billion in Brazilian sovereign and corporate debt after two agencies downgraded Brazil, analysts at JPMorgan Securities estimated in October.

It marked a bitter reversal for Latin America’s largest economy, seven years after a commodities-fueled boom helped propel it to investment-grade status, feeding expectation that its economy would escape sharp cycles of boom and bust that has kept millions in poverty.

Fitch said a deepening political crisis had restricted the government’s ability to right the economy.

Rousseff’s opponents have accused her of breaking budget rules and are trying to impeach her, while key allies are threatening to bolt her coalition amid a widening bribery scandal at state-run oil company Petroleo Brasileiro SA (Petrobras).

With Fitch leaving Brazil’s credit outlook on negative, and Moody’s Investor Services also reviewing its rating, further downgrades to the country’s creditworthiness could follow.

“The impeachment proceeding is a setback,” Shelly Shetty, Fitch’s head of Latin American sovereign ratings, told Reuters after t he downgrade. “Impeachment delays implementation of fiscal measures.”

The Supreme Court on Wednesday was weighing the legality of impeachment proceedings against Rousseff after Congress packed a special committee with the president’s opponents in a secret ballot last week.

Lower house Speaker Eduardo Cunha, who started the impeachment proceedings, was one of many lawmakers whose homes and offices were raided on Tuesday in the Petrobras probe, which has thrown Congress into disarray and delayed debate of key economic reforms.

“It’s hard to be surprised by the Fitch downgrade. Political uncertainties prevent any clarity about the economic outlook,” Candido Bracher, chief executive of Itau BBA, the investment bank unit of Brazil’s largest private bank, told Reuters.

Following the downgrade, Levy said losing the investment-grade rating was “serious” and showed the government had not done everything required.

He was silent when asked if he would stay on as finance minister.

Levy set out to win back investor confidence this year with an unpopular austerity agenda but has faced fierce resistance from congressional allies and ministerial rivals, raising expectations for his resignation.

Earlier on Wednesday, Levy said he felt “slightly sidelined” by Rousseff’s decision to water down a crucial fiscal savings target for next year.

He downplayed the importance of impeachment.

“In truth,” he told Band News, “It’s more important for us to understand this: What does the government want? What will it do, OK?”