Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

The arrest of Brazilian billionaire Andre Esteves in a corruption scandal has produced a double whammy: immediate pain for investors and longer-term financial angst for the country, and perhaps the world.

Esteves, the most prominent figure in Brazilian finance, who transformed BTG Pactual into the largest independent investment bank in Latin America, stands accused of seeking to pay off a former Petrobras director (who’s currently in jail) to leave him out of any court testimony in an investigation involving a pay-to-play scheme at the state-run oil giant. The inquiry has reached into the top echelons of power.

BTG Pactual’s investors responded swiftly. Its stock plummeted more than 30 percent and yields on its bonds almost doubled, with its $1 billion offering due in 2020 falling about 15 cents, to 75 cents on the dollar, to yield 12 percent. Investors in the firm’s dollar-denominated bonds lost hundreds of millions of dollars of market value in just a few hours Wednesday morning.

Bond Bust
BTG Pactual's dollar-denominated bonds suffered big losses on Wednesday.
Source: Finra's Trace, Bloomberg

 Traders are suddenly pricing in a real chance that BTG Pactual will end up having to restructure, even though some of its bonds carry investment-grade ratings. After several years of aggressive global expansion, BTG Pactual may now be forced to cut its losses and scale back some of its ambitions.

More broadly, the situation raises questions about the ability of Latin America’s biggest economy to come back from its woes. It fell into recession in the wake of moribund commodity prices, and the latest corruption development pushed stocks and its currency lower. BTG Pactual, the only publicly traded investment bank in Brazil, has investors all over the world, and they were feeling some pain on Wednesday. But that may be small in comparison to the misery they may face if the $2.3 trillion economy fails to revive.

Stock Swoon
Brazilian shares have been on the decline this year.
Source: Bloomberg

Markets despise uncertainty, and there’s plenty of that to go around in the Brazilian scandal. Citizens and investors are wondering how far the corruption extends and which executive may be swept up next. Perhaps more importantly, the expanding investigation distracts the government from formulating a plan to rescue the economy from what’s poised to be its longest recession since the 1930s. Brazil is a global player, so its stumbles have ramifications for worldwide growth.

The corruption scandal and arrest of Esteves are producing a dramatic saga Brazil. It could turn out to be the prologue to an ominous tale with a much broader audience.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net