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Brazil Economy Junked, President on Ropes

Sept. 10, 2015
The downgrade by Standard & Poors strips Brazil of its investment-grade status.

RIO DE JANEIRO—Brazil has been preparing to party as next year's Olympics host, but a credit downgrade to junk status means the world's seventh largest economy will be nursing a terrible hangover instead.

The downgrade by Standard & Poors, one of the main rating agencies, strips Brazil of its investment-grade status and leaves President Dilma Rousseff's government on life support, risking an investor rush for the exits, analysts said Thursday.

Just a few years ago, Latin America's biggest country was in carnival mode as one of the BRICS group of emerging giants, winner of hosting rights to both the 2014 World Cup and 2016 Summer Olympics, and lauded for lifting 40 million people from poverty.

But S&P's decision late Wednesday confirms that the samba has stopped.

With deep recession, the country's first ever deficit budget, a corruption scandal hitting surreal proportions and political paralysis, S&P didn't have to look far to justify marking Brazil as "speculative"—its score even lower than Russia's, which faces powerful Western sanctions.

"You have got an economy that has really hit the skids," said David Rees, senior markets analyst at research house Capital Economics in London.

"The only way they are going to get out of that situation is through a reform drive, but the political situation suggests that there is very little chance of that happening."

Giant Sucking Sound

Brazil saw economic growth peak at 7.5% in 2010 during a global commodities boom.

But much like Russia, Brazil has been hit hard by the plummeting value of oil and other raw materials, as well as drop in demand from BRICS kingpin China.

The embezzlement and bribes scandal centered on oil giant Petrobras, and Rousseff's political weakness already made Brazil a riskier bet. What Brazilians fear hearing next is the giant sucking sound of institutional investors like pension funds quitting the country.

"If another rating agency also lowers Brazil, then very probably we're going to see institutional investors obliged to pull their money out," analyst Andre Leite at TAG Investimento said.

"The market is very nervous," Andrei Perfeito, an analyst at Gradual Investimentos, said as the Sao Paulo stock market opened 2.2% lower. 

Political Capitulation

Finance Minister Joaquim Levy, a liberal economist brought in to salvage the economy with austerity measures, put on a brave face.

"Brazil is a country that is not on the brink of a crisis," Levy said. 

"It is a country that is retooling for the very different global outlook. And the sooner we make the adjustments, the less this change is going to be felt, and we will be able to grow again," he told TV Globo.

Analysts are less generous, describing the loss of Brazil's healthy credit rating as reflecting far deeper loss of confidence in Rousseff and her ruling Workers' Party or PT.

The PT has transformed Brazil since Rousseff's predecessor Luiz Inacio Lula da Silva came to power in 2003, using the commodities boom and consumer consumption, mixed with massive social spending, to reduce poverty and stimulate what then appeared to be a durable model.

But Rousseff can no longer pay the bills and, with single-digit popularity ratings, has been unable to push through the "adjustments" Levy wants. Some in Congress even want her impeached.

Political analyst Gabriel Petrus, at Barral M Jorge consultants, said opponents now have Rousseff over a barrel -- so weak that she will abandon the PT project in return for cooperation.

"It's not the end of the government, but it's the end of a project.... There is no other way out," he said.

"It's not a question any longer of keeping power or staying as president of the republic, but of keeping Brazil as a credible country."

Luiz Carlos Mendonca de Barros, a minister under former president Fernando Henrique Cardoso, went even further.

The credit downgrade "accelerates her end," he told Estadao daily. "It ended her government."

Corruption Black Hole

Standard & Poor's reasoning for the downgrade highlights "spillover effects" from the seemingly ever-expanding Petrobras corruption scandal.

Petrobras lost $2.1 billion in a scheme where top Brazilian executives and politicians are said to have robbed the company by cooking up inflated construction contracts in exchange for bribes.

Rousseff has not been accused, but she chaired the board at Petrobras between 2003 and 2010, when much of the alleged corruption was flourishing.

High level PT figures are among the dozens accused of involvement, further tainting Rousseff and Lula, currently seen as a longshot for a possible presidential comeback in 2018.

And S&P warns investors that the Petrobras black hole may yet wreak more damage.

"Ongoing investigations of corruption allegations against high-profile individuals and companies... have led to increased near-term political uncertainty," the ratings agency said.

Copyright Agence France-Presse, 2015

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