Brazil's Junk Relapse Makes Its Bonds Even Riskier Than Russia

Updated on
  • Brazil bonds trade in line with lower-rated Bolivia debt
  • In past 18 months, Brazil has suffered three rating downgrades

El-Erian: Brazil Is Stuck in a Vicious Cycle

Brazil’s plunge into junk status may be far from finished.

On Wednesday, Standard & Poor’s stripped Latin America’s biggest country of its investment grade, lowering it to BB+ and keeping a negative outlook on its debt.

With Brazil headed for its longest recession since the 1930s, bond traders are bracing for more rating cuts as political gridlock stymies desperately needed economic reforms.

Brazil’s borrowing costs have soared and its $2.15 billion of bonds due in 2023 now yield just 0.06 percentage point less than similar-maturity debt from Bolivia -- which is rated one level lower and is South America’s poorest nation. The advantage is the smallest on record.

Bolivia vs. Brazil

“The negative outlook makes it somewhat likely that there will be another downgrade within a year,” Barclays Plc said in a research report on Thursday.

While Moody’s Investors Service and Fitch Ratings still have investment-grade ratings on Brazil, Societe Generale emerging-market strategist Bernd Berg said another downgrade is likely in the next two months.

It also now costs 0.22 percentage point more to protect Brazil’s debt securities than those issued by Russia, a nation battered by sanctions and plunging oil prices. S&P, which was the first rating company to award Brazil an investment grade in 2008, also rates Russia BB+.

Brazil’s three rating cuts in the past 18 months have triggered a wave of corporate downgrades. Excluding financial firms, there have been 186 ratings cuts this year, more than double last year’s record tally of 69, data compiled by Bloomberg show.

“There is likely more bad news to come,” Geoff Dennis, a strategist at UBS AG, said in an e-mailed report.