The Fiscal Crisis and a New Downgrade

BRAZIL ECONOMICS - Report 22 Feb 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Standard & Poor’s lowered Brazil’s credit rating again, now to “BB”, two steps below investment grade, with a negative outlook. The announcement had virtually no effect on the markets: Brazil’s 10-year CDS quotation dipped 20 basis points and the real appreciated slightly. This behavior is no surprise. It is typical for asset prices to adjust quickly to economic information while risk rating agencies move much slower. In other words, the behavior of asset prices presages the direction of the agencies’ decisions, not the contrary. Despite the small impact on asset prices, the downgrade is a strong warning about the country’s precarious fiscal situation, which continues without any sign of solution, even after Finance Minister Nelson Barbosa announced new fiscal measures.

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