Levy Plays Down Brazil Downgrade Threat Following Target Cut

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Finance Minister Joaquim Levy played down the threat of a credit downgrade to junk, saying his decision to propose reduced budget savings hasn’t changed Brazil’s ability to meet bond commitments.

“There is not a fundamental shift in the debt dynamics and our capacity to pay debt, in particular external debt,” he said Thursday during a conference call hosted by JPMorgan Chase & Co. “The buffers in the Brazilian economy are quite significant.”

Not all investors were so optimistic on Thursday as the real touched a 12-year low and the Sao Paulo stock index led declines among major equity benchmarks. Levy’s decision a day earlier to reduce the target for a fiscal surplus that excludes interest payments sparked speculation Brazil will lose its investment-grade status.

Levy said Thursday he’s constantly in dialogue with ratings companies and is searching for new sources of revenue to fill government coffers. This month he met with Moody’s Investors Service officials, who last year lowered their outlook on Brazil’s Baa2 rating -- the second-lowest investment grade -- to negative. Moody’s cited weak growth that could erode “Brazil’s fiscal position and materially undermine its credit profile.”

Fiscal Adjustment

In an interview taped Wednesday and broadcast Thursday, Levy addressed that very concern.

“Our initial goal was calculated to bring public debt down,” he said in a Globonews interview. “We are paying attention to the debt. We have changed the dynamic of the public debt. There was a policy of expansion, with public bank loans. We have disciplined that.”

The minister on Thursday’s conference call cited the decision announced Wednesday to cut 8.6 billion reais ($2.6 billion) in spending this year as evidence that fiscal austerity will persist, driving home a point he made the day before.

“The government hasn’t given up on the fiscal adjustment, we have to continue, being a realistic policy, make the necessary adjustments,” Levy said in the Globonews interview. “We want to reduce uncertainties. This doesn’t mean changing strategies.”

The decision to target a primary surplus equal to 0.15 percent of gross domestic product in 2015 rather than the original 1.1 percent came after a shrinking economy eroded tax collection efforts, Levy said Thursday.

“This reduction in the target is not really news that the adjustment is over and we can claim victory,” Levy said on Thursday’s conference call. “It’s just the realization that we do have more work to do.”