Brazil on Verge of Default

Brazil’s sovereign rating was cut to junk by Standard & Poor’s, taking away the investment grade the country enjoyed for seven years, as President Dilma Rousseff’s struggles to shore up fiscal accounts amid a faltering economy.

The country’s rating was reduced one step to BB+, with a negative outlook, S&P said in a statement after markets closed. Brazil’s largest U.S. exchange-traded fund tumbled 6.6 percent in late trading along with American depositary receipts for Petrobras, the state-controlled oil company.

The downgrade, and S&P’s warning that another cut is possible, 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. Rousseff has been unable to find support for her initiatives amid an investigation into corruption at the state-controlled oil company that allegedly occurred while she was its chairman, sending her popularity to a record low and generating calls for her impeachment.

The political crisis that has been hindering the implementation of the fiscal adjustment and the deterioration of the economy were mentioned as the causes of the cut.

Fitch believes the recession experienced by the country will be deeper and longer than its earlier expectations. The agency forecasted the country’s GDP will shrink 3% this year and 1% in 2016.

Fitch was the “most optimistic” of the three major agencies. Standard & Poor’s stripped Brazil of its investment-grade credit rating in September. Moody’s had placed the country in the lowest investment grade – just above junk status -in August.

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