Brazil Cut To Junk By All Three Ratings Agencies After Moody's Joins The Fray

Tyler Durden's picture

Back in December we warned that Brazil faced a "disastrous downgrade debacle" that would eventually see the beleaguered South American nation cut to junk by all three major ratings agencies. 

S&P had already thrown the country into the junk bin and just six days after our warning, Fitch followed suit.

Between the country's seemingly intractable political crisis and worsening public finances, the outlook is exceptionally dire and just moments ago, Moody's cut Brazil to junk as well.

  • MOODY’S DOWNGRADES BRAZIL’S ISSUER, BOND RATINGS TO Ba2 W/ A
  • BRAZIL’S ISSUER & BOND RATINGS CUT TO Ba2 BY MOODY’S
  • DETERIORATING DEBT METRICS WILL RESULT IN A MATERIALLY WEAKER CREDIT PROFILE IN THE COMING YEARS

Watch the BRL and the Bovespa. Things likely won't be pretty.

Below, find the rationale.

*  *  *

From Moody's

Moody's downgrades Brazil's issuer and bond ratings to Ba2 with a negative outlook

The downgrade was driven by

  • The prospect of further deterioration in Brazil's debt metrics in a low growth environment, with the government's debt likely to exceed 80% of GDP within three years; and
  • The challenging political dynamics, which will continue to complicate the authorities' fiscal consolidation efforts and delay structural reforms.

The negative outlook reflects the view that risks are skewed toward an even slower consolidation and recovery, or further shocks emerging, which creates uncertainty over the magnitude of deterioration of Brazil's debt profile over the rating horizon.

RATIONALE FOR THE DOWNGRADE

Brazil's credit metrics have deteriorated materially since the Baa3 rating with a stable outlook was assigned in August 2015. That deterioration is expected to continue over the coming three years, given the scale of the shock to the Brazilian economy, the lack of progress made by the government in achieving its fiscal and economic reform objectives and the political dynamics expected to persist over that period. The downgrade to Ba2 is intended to captures that ongoing deterioration, while the negative outlook contemplates the risks of further deterioration to Brazil's credit profile emanating from macroeconomic shocks, deeper political dysfunction or the need to support government-related entities.

FIRST DRIVER -- DETERIORATING DEBT METRICS WILL RESULT IN A MATERIALLY WEAKER CREDIT PROFILE IN THE COMING YEARS

Macroeconomic and fiscal developments over the next two to three years are expected to produce a materially weaker credit profile. The government debt burden will continue to increase during 2016-18 and will likely exceed 80% of GDP before stabilizing. Growth dynamics will remain weak in the coming years increasing the pressure on fiscal policy. We expect GDP growth to average a negative 0.5% over the period 2016-18. Additionally, we expect interest rates to remain elevated in real terms, which will contribute to low debt affordability with interest payments accounting for more than 20% of government revenues.

SECOND DRIVER -- CHALLENGING POLITICAL DYNAMICS WILL COMPLICATE FISCAL CONSOLIDATION EFFORTS AND DELAY STRUCTURAL REFORMS

The rise in government debt will partly reflect the slow progress expected in achieving meaningful fiscal consolidation. Addressing Brazil's fiscal challenges will require significant political will and consensus to reverse the upward trend in public spending and stabilize the debt trajectory. The government is working to garner support in Congress for key reform bills, including to raise the minimum retirement age, improve fiscal flexibility, and reduce revenue earmarking. However, while discussion of structural reforms is a positive development, their approval by Congress will be difficult given the government's limited support in Congress and ongoing political challenges facing the President. And weak political support for the President and her administration offers little prospect of more far-reaching reforms over the rating horizon.

RATIONALE FOR THE NEGATIVE OUTLOOK

In Moody's view, progress in fiscal consolidation will be slow, and economic growth anemic, for the next two to three years. The Ba2 rating level builds in the assumption that the credit profile will deteriorate over that period. However, the negative outlook reflects the uncertainty surrounding the interaction between political, economic and financial dynamics in Brazil and in consequence the potential for additional shocks materializing, which would put further downward pressure on the sovereign credit profile. Additional shocks might relate to the impact of investor sentiment on the recovery in growth; to political events which lower still further the government's capacity to make progress on structural reforms; and/or to the crystallization of contingent liabilities on the government's balance sheet.

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XAU XAG's picture

My wifes Brazilian is still .......................priceless lol

VinceFostersGhost's picture

 

 

Think I'm gonna skip the Olympics and just have a Bud with Peyton at Disneyland.

Cognitive Dissonance's picture

Best.Summer.Olympics.Ever

<I can't wait for the 100 meter feces dash.>

Peter Pan's picture

As an Irishman would say, "Who do you think will come 1st 2nd and turd?"

NoDebt's picture

I wish somebody would go broke already and default on their debt.  Let's get this shitshow (pun intended) started.  Been waiting since 2008 and I'm not getting any younger.

boink.voink's picture

And so what is the credibility of these rating agencies themselves. They are just blood sucking leeches of the monster. Why would anyone believe these corrupt shitting agencies

willwork4food's picture

OT, but does anyone know what the BLACK MARKET exchange rates might be currently? I believe the "official" exchange is 5:1. I have a friend that is going to visit in June.

FreedomGuy's picture

Because their ratings have negative predictive value. They tend to overrate their clients so when they drop or downgrade it means something real serious as their predilection is to the positive.

HowdyDoody's picture

Are these the same rating agencies that say the US economy is A+++++? /sarc

The US is engaged in financial war with the rest of the world. Dump the USD. Default on all loans due to the US.

 

 

Cognitive Dissonance's picture

Issuing the world's reserve currency makes the US the cleanest dirty shirt. It may stink of high heaven but......

boink.voink's picture

In your dreams, US dollar is the shittiest shirt on the block, it is being chucked under the guillotine to chop its ugly head off, and it is trying to resist the inevitable.

No other currency is going anywhere,it is the euro and dollar that will be chopped off like a bitch that it is 

Debtpool's picture

Thank you for putting the front-page picture in the main article (and for making it bigger)!

buzzsaw99's picture

that means the squid is out for now but will be buying back in for pennies soon

XAU XAG's picture

Additional shocks might relate to the impact of investor sentiment on the recovery in growth; to political events which lower still further the government's capacity to make progress on structural reforms; and/or to the crystallization of contingent liabilities on the government's balance sheet.

 

 

Sounds like most DOT GOV'S around the world

Seasmoke's picture

Gooooooooooooooooal !!!!!!!!

firstdivision's picture

Just wait for the Canadian downgrades to come rolling in a few months. 

Sandmann's picture

Canada cannot be downgraded Lew Ayres as Treasury Secretary won't permit Trudeau-fils to be inconvenienced

Pumpkin's picture

A brunett and a blonde were talking.  The brunett smiles and tells the blonde, 'I had sex with a Brizilian last night'. The blonde, looking shocked, asks, 'exactly how many is that?'

XAU XAG's picture

How do you make a blonde laugh on a Friday?

 

 

Tell her a joke on Monday!

StackShinyStuff's picture

Why did the blonde have a sore belly button?

 

 

Her boyfriend was a blonde too...

Sandmann's picture

Moodys is downgrading Brazil because of Brexit no doubt ?  They will be downgrading Austria next for closing their borders.

Caleb Abell's picture

I'm frankly shocked that anyone would suggest that the ratings agencies are political tools.  I'll have you know that the ratings agencies are purely concerned with providing accurate assessments of credit-worthiness and have never, and will not ever, allow themselves to be used for political purposes.  They are honest and pure, and I would trust them with your life.

Scooby Doo's picture

But..... You would not trust them with your own life? ;-)

E.F. Mutton's picture

Needs more Olympics.  And immigration. 

When the Favelas start going hungry, it will get really interesting.

PirateOfBaltimore's picture

So Buffett got out of any risk positions tied to Brazil, and now Moody's downgrades.

buzzsaw99's picture

and the squid shit their brics already too. nobody gives a crap what the ratings agencies say anymore. they are just one long sick joke.

danl62's picture

Probably just a coincidence or Warren is just very lucky.

Peter Pan's picture

What we all fail to take into account is tht once and eonomy loses traction it is easier for it to slide further than it is for it to bounce back up, particularly when large debt and flat Chinese demand is at play.

Brazil will degenerate into a basket case given time.

Kefeer's picture

Quote: " the government's debt likely to exceed 80% of GDP within three years;" - end

 

While the US is at >96% as of 2013.  I believe it is over 100% and sure it is if the number were transparent.  Just confirmed by the St. Louis FED; were over 100% as of Q3 2015.   https://research.stlouisfed.org/fred2/series/GFDEGDQ188S

PirateOfBaltimore's picture

Don't worry, we'll grow our way out...somehow...despite national debt rising at a rate greater than GDP growth.

Kefeer's picture

Print growth?!  Get rid of people to make per capita growth; now that is true psychopathological thinking.

CuttingEdge's picture

Aye, at the moment as Cog says, the cleanest dirty shirt...but for how much longer? $4trillion a year to the national debt, was it? With (unless you believe the Bureau of Bullshit Statistics) a middle class becoming extinct, so vibrant is the economy.

Tick tock...

GOSPLAN HERO's picture

USSA upgraded to ccc--------.

Infield_Fly's picture

OWE-lympics!!! FUCK YEAH!!!

FreedomGuy's picture

The question is whether they will stay solvent long enough to host the Olympics. It is all going on the Nationale Credite Carde. Totally corrupt country..

rex-lacrymarum's picture

Time to buy Brazil soon?