Brazil Real Drops on Speculation Credit Rating May Be Lowered

Brazil’s real declined, giving up earlier gains, on speculation among traders that the nation’s credit rating may be lowered.

Credit-default swaps for Brazil rose while the benchmark stock index fell for a second day and interest-rate swaps jumped to an eight-month high. The real slid 0.4 percent to 1.9721 per dollar. It earlier advanced as much as 0.3 percent.

“There was a rumor in the market about a downgrade of Brazil,” Italo Abucater, the head of currency trading at ICAP do Brasil, said by phone from Sao Paulo. “It’s just rumors. nothing has been confirmed.”

Sebastian Briozzo, a Standard & Poor’s analyst in Buenos Aires, said in a phone interview that the Brazilian government’s macroeconomic approach is “prudent” and the rating company doesn’t see “any significant change of factors that could heavily weigh on our evaluation of Brazil’s sovereign rating.”

Mauro Leos, a senior analyst at Moody’s Investors Service in New York, said by e-mail that the rating company plans no change in its assessment of Brazil. Brian Bertsch, a Fitch Ratings spokesman, didn’t return a phone call and e-mail seeking comment.

Default Swaps

The cost of protecting Brazilian bonds against default for five years climbed one basis point, or 0.01 percentage point, to 124 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The Bovespa (IBOV) declined 1.4 percent. Swap rates due in January 2016 rose 10 basis points to 9.16 percent, the highest on a closing basis since June 21.

Speculation about Brazil’s credit rating started after S&P boosted its outlook for Mexico yesterday, Roberto Simoes, the head of proprietary trading at BES Investimento, said in a telephone interview from Sao Paulo.

Swap rates climbed on speculation central bank minutes due tomorrow will signal plans for an increase in borrowing costs to contain accelerating inflation.

Inflation has remained “very resilient” since the second half of 2012, central bank President Alexandre Tombini said yesterday in Warsaw, four days after the government eliminated taxes on staples to rein in consumer prices. Annual inflation accelerated to a 14-month high of 6.31 percent in February, the government reported last week.

Policy makers dropped a pledge made in October to keep borrowing costs unchanged for a “prolonged period” from their statement on March 6 as they left the target lending rate at a record low 7.25 percent.

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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