16 Dec 2015
Brazil: Between a downgrade and Levy’s departure - TDS
FXStreet (Córdoba) - Fitch downgraded Brazil’s credit rating below the investment grade. According to analysts from TD Securities Brazil assets will continue to underperform.
Key Quotes:
“This will bring further upwards pressure on Brazil’s sovereign CDS as well as government bond yields, as there are now two rating agencies that have the country rated “junk”, with Moody’s waiting in the wings having put their rating under review last week (for a cut to junk). This is obviously not currency-positive, however we think that with the junk rating already held by S&P, the cat is already out of the bag which has partially contained the immediate knee-jerk reaction in BRL.”
“Rumours of the impending departure of Finance Minister Levy are given greater credence by this downgrade, though nothing official has been announced. Should Levy go and be replaced with a Minister seen as better able to navigate politically (Meirelles has been rumoured in the past), we could see Brazilian assets rally in relief.”
“This does however give greater certainty that the central bank will hike rates at the January 21 meeting, a call that we were more hesitant to make, but it now seems likely that the central bank will have to demonstrate its ability to hold the line as the one last vestige of responsible economic management that the country has.”
“Risks going forward on the sovereign front continue to be the future of Levy, the impeachment process, as well as a potential downgrade from Moody’s. A Levy ouster could end up being BRL-positive, depending on who would be named as his replacement.”
Key Quotes:
“This will bring further upwards pressure on Brazil’s sovereign CDS as well as government bond yields, as there are now two rating agencies that have the country rated “junk”, with Moody’s waiting in the wings having put their rating under review last week (for a cut to junk). This is obviously not currency-positive, however we think that with the junk rating already held by S&P, the cat is already out of the bag which has partially contained the immediate knee-jerk reaction in BRL.”
“Rumours of the impending departure of Finance Minister Levy are given greater credence by this downgrade, though nothing official has been announced. Should Levy go and be replaced with a Minister seen as better able to navigate politically (Meirelles has been rumoured in the past), we could see Brazilian assets rally in relief.”
“This does however give greater certainty that the central bank will hike rates at the January 21 meeting, a call that we were more hesitant to make, but it now seems likely that the central bank will have to demonstrate its ability to hold the line as the one last vestige of responsible economic management that the country has.”
“Risks going forward on the sovereign front continue to be the future of Levy, the impeachment process, as well as a potential downgrade from Moody’s. A Levy ouster could end up being BRL-positive, depending on who would be named as his replacement.”