Banks Spur World’s Biggest Decline for Ibovespa Amid Higher Tax

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A slump in Brazilian banks sent the Ibovespa to the biggest drop among the world’s major equity benchmarks after the government raised a tax on industry profits.

Banco do Brasil SA, Itau Unibanco Holding SA and Banco Bradesco SA have dropped at least 8.8 percent this week, the most among 40 stocks in the Bloomberg Americas Banks index. Lenders, brokerages and credit-card processors will pay a 20 percent tax on earnings, up from 15 percent, according to a presidential decree. The nation is also freezing 69.9 billion reais ($22.6 billion) in spending from this year’s budget, the Budget Ministry said in a statement distributed to reporters.

Brazil is trying to manage the widest budget gap in 16 years and avoid a credit downgrade as the economy heads to the worst recession since 1990. The budget freeze was in line with estimates and came almost at the end of the trading day, preventing any major market reaction, according to Joao Pedro Brugger, a money manager at Leme Investimentos. As for the increase in the bank tax, Itau BBA said the change may cost the industry as much as 8 percent of earnings in the long term.

“It’s much more comfortable for the government to raise taxes instead of cutting expenses,” Rogerio Freitas, a partner at Teorica Investimentos, which manages an equity hedge fund that beat 93 percent of its peers in the past year, said by phone from Rio de Janeiro. “But it’s bad for the economy, it’s bad for the market. There’s still a lot of uncertainty.”

The Ibovespa retreated 1.3 percent to 54,377.29 at the close in Sao Paulo, extending its weekly slide to 5 percent, the worst since December.

S&P, Fitch

The primary budget target is a key component of Finance Minister Joaquim Levy’s promise to rein in spending and rebuild investor confidence. Standard & Poor’s cited weaker fiscal accounts when it cut Brazil’s rating to the cusp of junk last year, as did Fitch Ratings when it changed the sovereign outlook to negative last month. Fitch rates Brazil two steps above non-investment grade.

The nation’s shares entered a bull market last month, after rallying more than 20 percent from their January low, on prospects for government spending cuts and after Petroleo Brasileiro SA reported long-delayed earnings. Since then, the Ibovespa has fallen 3.9 percent on concern the economy would slow further amid the fastest inflation in more than a decade.

Financial stocks extended a five-day slump to 11 percent. Itau, Bradesco and Banco do Brasil slid at least 2.1 percent.

Utility Centrais Eletricas Brasileiras SA slipped to the lowest level since May 4. Moody’s Investors Service cut the company’s rating to junk late Thursday, and said the credit grade remains on review for further downgrades.

Petrobras had the worst weekly decline since March as crude retreated.

Vale SA, the world’s largest iron-ore producer, rose 1.3 percent. While the price for the steelmaking ingredient jumped 3.5 percent on Friday, it remains 69 percent below a record $191.70 in 2011.

Trading volume of equities in Sao Paulo was 8 billion reais, according to data compiled by Bloomberg. That compares with a daily average of 7 billion reais, according to the exchange.

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