Ratings agency Standard & Poor’s downgraded Brazil’s credit rating to junk grade late on Wednesday, citing the mounting political problems that are driving a government deficit in Latin America’s largest economy.
The downgrade, while widely expected, came earlier than many forecast.
The downgrade makes S&P the first rating agency to bring Brazil back into speculative territory after seven years as investment grade.
The 2008 rating was a key component of solidifying Brazil’s burgeoning economic power during its ten year commodities boom, which has fizzled in recent years as Chinese demand has waned.
At the time, S&P revised Brazil’s outlook to negative from stable.
If matched by another credit-ratings firm, the downgrade could trigger a massive outflow of cash from Brazilian financial markets, as big worldwide pension funds often invest only in assets rated as investment class by at least two of three major firms.
It also puts pressure on the economic team led by Finance Minister Joaquim Levy to win passage of measures that would shore up the country’s fiscal situation by cutting spending or raising taxes.
Planning Minister Nelson Barbosa said the government would continue to honor its financial commitments.
The ratings agency said the move was in response to last week’s submission by Ms Rousseff of a budget bill that projects a fiscal deficit for 2016.
S&P cut Brazil’s rating to BB-plus, which denotes substantial credit risk, from BBB-minus. “This is against a backdrop of low approval ratings for President Rousseff and her government, which have declined to less than 10 per cent, and the possibility that the president may be impeached (although this outcome is not our base case)”.
Rousseff’s left-wing government had imposed austerity measures in a bid to avoid such a downgrade.
Brazil also recently re-entered recession after second-quarter results showed the economy had shrunk by 1.9 percent.
Besides seeking congressional support for a possible impeachment trial against Rousseff, the movement also will begin a signature-gathering campaign to bolster “the voice already being expressed in the streets”, Sampaio said.
The country could be hit with another headache next week should the U.S. Federal reserve decide to hike interest rates for the first time in nearly a decade – an event known to cause turmoil in countries like Brazil.
The lawmaker was referring to the millions of people who have taken part in rallies to protest Rousseff’s administration, some of whom have called for her resignation or ouster.