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Brazilian Dollar Bond Slump Deepens as S&P Lowers Rating Outlook

June 07, 2013

Brazil’s benchmark dollar bonds fell after Standard & Poor’s cut the government’s credit rating outlook to negative amid an economic slump that’s threatening to drive up debt levels.

The nation’s $2.2 billion of bonds due 2023 fell 0.19 cent to 92.40 cents on the dollar at 12:10 p.m. in New York, the lowest price on a closing basis since the notes were issued in September, according to data compiled by Bloomberg. Yields rose 3 basis points, or 0.03 percentage point, to 3.57 percent, extending their increase over the past five days to six basis points, the fifth straight weekly jump.

S&P lowered yesterday the outlook on Brazil’s BBB rating, which is two levels above junk, saying it was concerned by the country’s sluggish economic growth, weakening fiscal accounts and loss of credibility with investors. S&P also cut the rating outlook for state-controlled companies Petroleo Brasileiro SA and Centrais Eletricas Brasileiras SA.

“There are a number of elements contained in the evaluation set forth by S&P that we also see as highly important risks ahead for Brazil,” Enrique Alvarez, the head of Latin America for fixed income at research company IdeaGlobal, wrote in a note to clients. “We can only suspect that the trading sessions that lie ahead for this currency, and Brazilian sovereign paper, both domestic and global, will include upped overall bearish pressure.”

The move by S&P threatens to end a decade-long stretch of rating upgrades for Latin America’s biggest country. The extra yield investors demand to own Brazilian bonds over Treasuries has surged 46 basis points in the past month to 209 points today in New York, according to JPMorgan Chase & Co. data.

Lackluster Growth

“We could lower the credit rating in the coming two years if continued sluggish economic growth, weaker fiscal and external fundamentals, and some loss in the credibility of economic policy given ambiguous policy signals diminish Brazil’s ability to manage an external shock,” S&P said in the report.

Brazil’s economy expanded 0.9 percent last year and is forecast to grow 2.77 percent in 2013, according to a central bank survey published June 3. Quickening inflation has prompted policy makers to boost interest rates by 0.75 percentage point this year after they lowered borrowing costs by 5.25 percentage points from August 2011 through last year.

The annual inflation rate rose to 6.5 percent in May, matching the upper end of policy makers’ target range, from 6.49 percent in April, a government report showed today.

Lackluster growth is causing the country’s fiscal outlook to deteriorate and increasing the government’s debt burden, raising the chances of a downgrade in the next two years, S&P analyst Sebastian Briozzo said in an e-mailed statement. There’s at least a one-in-three chance of a rating cut, S&P said.


“Continued slow economic growth, weaker fiscal and external fundamentals and some loss in the credibility of economic policy given ambiguous policy signals could diminish Brazil’s ability to manage an external shock,” Briozzo wrote.

The nation’s currency has fallen 8.4 percent in three months, the biggest drop among 24 major emerging-market currencies tracked by Bloomberg, to 2.1377 reais per dollar as rising U.S. bond yields drew capital away from Brazil. The government removed a tax on foreigners’ bond purchases this week in a bid to lure investment.

S&P last upgraded Brazil in November 2011. The country is rated BBB by Fitch Ratings and an equivalent Baa2 by Moody’s, which has a positive outlook on the grade.

“There was no change in rating, but a review based on growth outlook in 2013,” Marcio Holland, economic policy secretary at the Finance Ministry, said yesterday after S&P announced the outlook revision. “There is no change in economic policy and the environment is conducive to investment. Fiscal policy is anti-cyclical, not expansionary.”

To contact the reporters on this story: Katia Porzecanski in New York at; Blake Schmidt in Sao Paulo at

To contact the editor responsible for this story: David Papadopoulos at

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