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Return To Junk Status "Only A Matter Of Time" For Latin America's Most Important Economy: Barclays

Tyler Durden's picture




 

Brazil’s embattled President Dilma Rousseff suffered another setback on Monday when Vice President Michel Temer elected to drop his role as Rousseff’s day-to-day liaison in Congress.

As Reuters reports, "Temer is an important ally of Rousseff and his decision will further hamstring the unpopular president, who is facing calls for her resignation or impeachment as the economy flounders." Here’s more: 

Temer's decision is seen as a prelude to the departure of his Brazilian Democratic Movement Party (PMDB), the nation's largest, from the governing coalition of the Workers' Party to field its own candidate in 2018.

 

Valor Economico newspaper reported on Friday that the PMDB would formally announce its decision to break with the Rousseff government at a party congress on Nov. 15.

 

PMDB officials told Reuters the party would break with Rousseff's coalition at some point because it plans to field its own presidential candidate in 2018, but it was not considering leaving this year. The PMDB controls both houses of Congress and its break with the government would seriously weaken Rousseff.

The move comes as the government elected to drop one in four ministries in an effort to rein in spending although, as one Sao Paulo political analyst told Reuters, "[Temer’s decision] will reinforce market worries about the government's ability to execute economic policies."

Those worries come as the country struggles to cope with both fiscal and current account deficits and a nasty bout of stagflation, all of which we’ve discussed at length. Visually, the problem looks like this:

The political and economic turmoil (with the latter punctuated by a horrendous unemployment print for July) couldn't come at a worse time.

The country sits at the center of the global EM unwind and between the uncertainties surrounding the government's ability to implement austerity combined with the pain from falling commodity prices and sluggish demand from China, there are now very real questions about how long the country can maintain its investment grade rating.

Here's Barclays with more:

The global and domestic environments have soured, and the clock is ticking for Brazil to prove its creditors that it still belongs to the investment grade club. The Fed is about to embark on policy normalization that should, albeit gradually, put the period of easy dollar funding behind us. China seems to be accepting the inevitable fact that its large economy is structurally slowing and has so far resisted fighting the slowdown with fiscal stimulus as it did in the past. Commodity prices have been responding to this new outlook for some time, and they now look particularly vulnerable following China’s recent steps. 

 

For Brazil, the global backdrop, while still better than during most of its history, feels hostile relative to the one it faced in its recent past.

 

As they should, excesses have been exposed by tough times; however, this time, policy mismanagement likely carries more blame than complacency to the now gone good times. Brazil’s fiscal slippage accelerated ahead of the elections (Figure 1), in line with most of LatAm’s well-documented historical pattern. To varying degrees, most observers were not surprised by the Rousseff administration’s decision to boost spending before the polls. The surprise, instead, was how it handled it after winning the election.

 

The Petrobras corruption scandal eroded what was left of President Rousseff’s already damaged political goodwill.

 

This backdrop has left the country in a recession, its fiscal accounts shaky and consumer sentiment depressed. Latent social unrest may deprive the already weakened administration of the vigor needed to keep the country from losing its hard-earned investment grade rating.

 

The country is at a crossroads and markets are taking note. With the economy contracting and the central bank raising rates, 2y inflation breakevens are receding from recent highs. At the same time, however, long-dated breakevens are creeping up, likely a sign of rising fiscal concerns. Markets may be pricing risks that Brazil’s challenging fiscal dynamics could end up being monetized (Figure 2).

 

Doubts about the fiscal plan are thus raising questions of whether the central bank will remain committed to honor its inflation target at all times. The central bank, which is not independent, will be left between a rock and a hard place. On one hand it will be tempted to ease rates to support its battled economy as soon as near-term inflation and expectations stabilize. On the other, it will have to keep a hawkish eye on long-dated breakevens to avoid worsening credibility concerns.

 

*  *  *

The takeaway: "We conclude that, under current circumstances, it is only a matter of time until Brazil loses its investment grade status."

Or, summed up in a picture:


 

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Mon, 08/24/2015 - 19:27 | 6466178 HedgeAccordingly
HedgeAccordingly's picture

man...

Heck US oil producers are going to be junk status soon... cannot take many more days of -6% until OIL is at zero and latin america is literally broke... 

http://hedgeaccordingly.com/2010/01/theoretical-spy-chart-foreshadowing....

Mon, 08/24/2015 - 19:30 | 6466190 NotApplicable
NotApplicable's picture

Those Sugarbabies are nearly as happy as the one in the last post.

Mon, 08/24/2015 - 20:07 | 6466361 MalteseFalcon
MalteseFalcon's picture

Brazilians have never been able to run a large, peaceful, resource rich country properly.

So why should anyone be surpurised by this?  Or care?

Mon, 08/24/2015 - 20:21 | 6466412 tarabel
tarabel's picture

 

 

They can't even speak proper Spanish down there.

(And yes, I know about the Pope's dividing line for South America. It's a joke, son.)

Mon, 08/24/2015 - 22:21 | 6466933 MalteseFalcon
MalteseFalcon's picture

They speak Portuguese. So what? They could speak any language.  Their country would still be a ridiculous cluster-fuck.

Mon, 08/24/2015 - 22:53 | 6467039 Buck Johnson
Buck Johnson's picture

I know, they have been awfully quiet about this on the MSM very quiet.  Also Brazil on top of their political trouble and financial situation they have the summer Olympics also to deal with in a year or so.  It's going to be hell.

 

Mon, 08/24/2015 - 19:29 | 6466185 38BWD22
38BWD22's picture

 

 

Brazil, Russia, India, China and South Africa (the BRICS) are all taking an even worse beating than we are.

Don't be fooled by Goldman Sachs's marketing slogan...

Mon, 08/24/2015 - 19:30 | 6466191 silverer
silverer's picture

Tell the boys from Brazil they'd better start stacking some gold behind their currency.  Oh, wait!  They don't have any?  Never mind...

Mon, 08/24/2015 - 19:34 | 6466210 buzzsaw99
buzzsaw99's picture

Terence James "Jim" O'Neill, Baron O'Neill of Gatley took the money and ran. buy brics, see ya! lulz.

Mon, 08/24/2015 - 19:46 | 6466251 PrimalScream
PrimalScream's picture

Brazi is getting hammered.  And yes, things probably will get a lot worse.  But it would take an economic genius to pull Brazil out of this mix of "bad karma" for its economy.  No matter who runs the country, they are in for a tough time.

ONE THING to think about, though.  Brazil sells commodities.  For example, the paper you use in your Laser Printer was probably produced from trees in Brazil.  Brazil's currency value has been dropping.  So that means that the COST of your paper should be going down, right?  ONLY IT'S NOT!!

International Companies who reap the benefits from "commodity producers" like Brazil - are NOT passing the lower costs to consumers in the USA and Europe.  They are simply boosting their own profits.  So consumers lose out, and so does Brazil. 

 

Mon, 08/24/2015 - 19:47 | 6466259 youngman
youngman's picture

Brazil built millions of condos in their boom...and everyone was buying one, two ,and three as an investment..cars too...they all thought it was going up to the moon....I assume the values are dropping now...and loans are being called....they overbuilt and overhyped...

Mon, 08/24/2015 - 20:00 | 6466330 Montani Semper ...
Montani Semper Liberi's picture

 I know what can turn the Brazilian economy around! Massive infrastructure spending on the 2016 Summer Olympics. Just look at the economic miracle the games gave Greece in 2008 after they spent a measly $15 billion. What a bargain that was!

 BTW, is there a plan B for the olympics if the host country is unable live up to its commitment?  

 

Mon, 08/24/2015 - 20:19 | 6466407 tarabel
tarabel's picture

 

 

They could just auction off the medals the way they do the venue itself.

Mon, 08/24/2015 - 20:07 | 6466358 youngman
youngman's picture

I dont know ..but I doubt the water cleanup is going to be financed...Brazil will use the toys..they love to play games..

Mon, 08/24/2015 - 20:39 | 6466464 TheAntiProgressive
TheAntiProgressive's picture

Brazil won't make it till 2018 they better get in gear and toss out the Socialists right the heck now.  Remember the Olympics are next year in Rio.  The F&B + Entertainment will be cheap, but don't know about the housing, maybe.....

Tue, 08/25/2015 - 04:02 | 6467502 SmittyinLA
SmittyinLA's picture

LoL Latino voters America's future.

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