Brazilian firms have credit ratings cut to junk

Petrobras and several other leading Brazilian companies had their credit ratings downgraded to junk by Standard & Poor's in the wake of the ratings agency's decision to strip the South American country of its investment grade status on Wednesday.

The move will heap further pressure on Brazil’s corporate sector which is already struggling with its worst recession in decades.

Petrobras’ second downgrade to junk this year will further complicate the ability of the oil giant to fund its operations at a time when it has already been crippled by a massive corruption scandal, the plunge in the global oil price and the corporate world’s biggest debt mountain.

State-owned Banco do Brasil and the country's number two private bank Bradesco led the downgrades among 13 financial firms. The move by the ratings agency led to further drop of the real which is trading at 12-year lows against the dollar with market analysts warning the sell-off is likely to intensify.

In a note reacting to the downgrade Morgan Stanley warned "we would expect outflows in anticipation of possible further downgrades".

Brazil’s loss of investment grade status heaped further pressure on emerging markets which have been hit by a dramatic drop in the price of commodities provoked by the slowdown in China.

Corporate debt worries

Markets are also worried about the high levels of emerging market corporate debt now that the US Fed is debating when to start raising interest rates. As in other emerging markets, Brazil’s leading companies took advantage of near zero interest rates in the US to load up on cheap dollar-denominated debt

There were signs of denial among the country’s ruling Workers Party about the significance of Standard & Poor’s move and the impact it will have on Brazil’s already battered economy. José Guimarães, the leader of the ruling Workers Party in the lower house of congress, said “we are not going to give much credibility to someone who doesn’t know the reality of the Brazilian economy”.

But embattled finance minister Joaquim Levy, while criticising the political nature of the agency's decision, said yesterday the government would announce new measures this month to bridge the fiscal gap necessary to produce a 0.7 per cent primary fiscal surplus next year.

Signalling the need to raise new taxes, a move resisted by congress, he warned Brazilians “are going to have to make an additional effort and we need to guarantee that this country is safe for investors and families.”