Fitch downgrades Brazil to junk, outlook negative

As Brazil suffers from ailing economy and political instability Fitch downgrades country's credit rating

Photo by: Reuters
Photo by: Reuters

A demonstrator carries a Brazilian national flag during a protest calling for the impeachment of Brazil's President Dilma Rousseff in Rio de Janeiro

Fitch Ratings cut Brazil's credit rating to junk grade on Wednesday, the second such downgrade in three months, citing a deepening recession and political risks associated with the impeachment proceedings against President Dilma Rousseff.

Fitch downgraded Brazil to BB+ with a negative outlook, underscoring its concerns about a widening fiscal deficit that the leftist president has struggled to close as tax revenue fell in the sharpest economic downturn of the last quarter century.

A political crisis has also tied Rousseff's hands this year as opponents try to unseat her, saying she broke budget rules, and the fragile governing coalition unravels in a corruption scandal stemming from state-run oil company Petrobras .

Standard & Poor's cut Brazil's rating to junk in September and Moody's Investors Service put the country on review last week for a possible downgrade to junk status.

Economists had warned that a second downgrade would trigger capital outflows because many foreign pension funds and other large investors are required to unload bonds once two separate agencies rate them as speculative grade.

Brazil's currency, the real, fell about 2 percent in midday trading. The Fitch downgrade added to pressure from a widely anticipated US interest rate hike and signs of discontent from the finance minister who is leading efforts to push through Rousseff's unpopular austerity agenda.

Following the downgrade, Finance Minister Joaquim Levy said on Wednesday that losing investment grade is "serious" and shows the government has not done everything that needs to be done. He remained silent when asked if he would remain in his position.

Earlier in the day, Levy said he felt "slightly sidelined" by the government's decision to lower a key fiscal savings target for next year.