Brazil Credit Rating Cut To 'Junk' By S&P, For The First Time In 7 Years

Standard & Poor’s downgraded Brazil’s credit rating to “junk” Wednesday, revoking the country’s investment-grade rating awarded in 2008. The decision to downgrade Brazil’s sovereign debt by one notch -- to BB-plus from BBB-minus -- is likely to aggravate one of the worst economic downturns the South American nation has faced in over two decades.

Brazil was awarded an investment-grade rating by S&P in April 2008, when the country’s economy was on the rise. However, since then, a plunge in commodity prices -- mainly caused by a drop in Chinese demand -- coupled with stringent austerity measures implemented by President Dilma Rousseff’s administration, has created a recession in the country.

Brazil’s economic output shrank 1.9 percent in the second quarter of this year, according to official data released last month. It followed a 0.7-percent contraction in the first quarter.

Moreover, Rousseff’s efforts to tackle the country’s growing debt and rally investors’ confidence have also faced stiff opposition. She is facing calls for her resignation over a corruption scandal at the state-run oil giant Petrobras, which allegedly occurred while she was its chairperson.

The loss of the investment-grade rating is likely to provide further ammunition to Rousseff’s critics, who have fiercely opposed her administration’s stringent austerity measures.

“It’s a major defeat for the government, a major stigma for the Rousseff administration that puts the government even more on the defensive,” Thiago de Aragao, an analyst at political consulting firm Arko Advice, told the Wall Street Journal.

The U.S. ratings agency also maintained a negative outlook on the new rating, indicating that further downgrades are possible. And, if another ratings agency drops Brazil to junk status, the downgrade could trigger a massive outflow of cash from Brazilian financial markets.

“If another rating agency also lowers Brazil, then very probably we're going to see institutional investors obliged to pull their money out,” Andre Leite, an analyst at TAG Investimento, told the BBC. Several international funds often invest only in assets rated as investment class by at least two of three major firms.

Fitch Ratings currently rates Brazil at BBB, two notches above investment grade, with a negative outlook, and Moody’s Investors Service downgraded Brazil to its lowest investment-grade rating last month but gave it a stable outlook.