Fiscal Deterioration Costs Brazil Another Downgrade

The negative outlook, according to S&P, reflects a 30% possibility of a further downgrade because of fiscal deterioration probability.

Most Brazilians do not like Dilma Rousseff, and now, it seems that neither do investors or lending entities. It is true, rating agencies are only part of a global Ponzi scheme, however, it is their opinions about the creditworthiness of a country what determines whether that country has access to the opium known as out of control lending.

The reality of having to borrow money indefinitely due to the poor management of public funds, irresponsible spending and empty promises becomes even more difficult to deal with during economic depressions such as the one Brazil is in right now.

One of the biggest nightmares for the economic team Dilma Rousseff and Brazilian businessmen formed after her reelection, began to take shape on Wednesday: the rating agency Standard & Poor’s downgraded the credit rating of Brazil by withdrawing the seal of “good payer”, which usually guarantees credibility for investors interested in the country.

Less than six weeks after the last revision of the rating of the South American giant, S&P, one of the most prestigious firms in the market, attributed the decision to the budget proposal for 2016, which anticipates a deficit of at least 30,000 billion reais, the equivalent to 7 billion euros. In addition, the agency has not ruled out a new downgrade given the continuous decline of the Brazilian economy.

While politicians in Brasilia vow to do whatever it takes to make the economy grow again, companies all around the country have begun to close their doors, offer forced vacations to their workers or moved elsewhere.

In Rio Grande do Sul, one of the best-off regions of the country, home of companies such as Stihl, GM and other American and European manufacturers, people have been laid off in large numbers, hundreds at a time.

In other cases, manufacturing suppliers are reducing output and in extreme situations, large manufacturers have had to start a hunt for new supplies to replace the ones that are leaving of have left.

In a statement, S&P said political challenges in Brazil continue to grow, and that those challenges weigh on the ability and capacity of the Government to comply with the adjustment started in the second term of President Dilma Rousseff.

The agency explained that this situation “could mean three consecutive years of primary deficit and increasing debt if no further income or cost-cutting measures are adopted”.

For the market, the downgrade of Brazil was taken for granted, therefore it had already set prices accordingly, that is, the operators had already  accounted for that decision for forecasting future rates.

The process, however, seems to have accelerated with the presentation of the first budget deficit since Brazil achieved monetary stability. At the same time, it is also possible to hear public disagreements between members of the economic team about what to do with the fiscal hole.

Hours before it was even known about the downgrade, finance minister Joaquim Levy said that “if we lose investment grade, we will have to put together the pieces to regroup, but it will be much more difficult.”

It is the first time that a government official from the Rousseff administration shows any kind of hesitation about what to do or how difficult it may be to recover.

Levy came into office as the pale horse of austerity and a cost cutter, however, his work has not been easy due to political opposition to austerity.

The Planning Minister, Nelson Barbosa, responsible for the budget, has been less catastrophic. He said the decision was a “surprise” but reaffirmed the commitment to fiscal balance.

In opposition, the news was valued as a “foretold tragedy.” The expectation is that the Brazil’s market will overreact Thursday by the loss of investment grade.

The “good payer” seal was held by the country since 2008, during the government of Lula da Silva, as a symbol of their changing economic and political status in the global arena.

The evaluation of the agency determined that Brazil’s creditworthiness should go from BBB- to BB+ with a negative outlook, indicating the possibility of a further downgrade.

The same outcome took place in countries that have gone belly up, such as Greece, Portugal, Spain, Italy and France, although in their case the credit agencies avoided issuing bad reviews.

The S&P’s decision comes less than a month after Moody’s lowered the credit rating of Brazil from Baa2 to Baa3. The agency is the first among the more prominent ones to reduce the investment grade for Brazil.

At Moody’s, the country is on the last step before the speculative grade is awarded. For Fitch, Brazil is two degrees above.

The negative outlook, according to S&P, reflects a 30% possibility of a further downgrade because of fiscal deterioration probability.

Luis R. Miranda is an award-winning journalist and the founder and editor-in-chief at The Real Agenda. His career spans over 18 years and almost every form of news media. His articles include subjects such as environmentalism, Agenda 21, climate change, geopolitics, globalisation, health, vaccines, food safety, corporate control of governments, immigration and banking cartels, among others. Luis has worked as a news reporter, on-air personality for Live and Live-to-tape news programs. He has also worked as a script writer, producer and co-producer on broadcast news. Read more about Luis.