Ibovespa Leads Americas Losses as Real Slumps on Moody's Signal

  • Second downgrade to junk seen triggering rout in assets
  • Bradesco, Petrobras contribute most to stock gauge's decline

Brazil’s stocks led losses in the Americas and the real declined after Moody’s Investors Service signaled it may cut the nation’s credit rating to junk amid forecasts for political turmoil and the longest recession since the 1930s.

Lender Banco Bradesco SA contributed the most to the drop in the Ibovespa. State-controlled oil producer Petroleo Brasileiro SA extended this year’s plunge to 26 percent. The real posted the biggest slump among Latin American currencies. Yields on Brazil’s $4.3 billion benchmark bonds due 2025 climbed to the highest level since they were issued in Oct. 2013. The cost of insuring Brazilian debt in the credit-default swaps market increased to a seven-week high.

Traders pushed down the value of Brazilian assets as Moody’s statement cast doubt on President Dilma Rousseff’s ability to shore up the budget as a corruption scandal fuels gridlock in Congress. The ratings company put Brazil’s Baa3 grade under review for downgrade Wednesday and said that a turnaround in the economic and fiscal performance next year appears unlikely. A second cut to junk could trigger a selloff of Brazilian assets by some institutional investors whose bylaws prevent them from holding such securities. Standard & Poor’s stripped Brazil of investment-grade status in September.

"This is a stronger action than just a negative outlook," said Win Thin, the head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York. "It’s a done deal, the economic numbers point to a downgrade.”

The Ibovespa retreated 1 percent to 45,630.71 in Sao Paulo, while the real declined 1.6 percent to 3.8124 per dollar. Petrobras slumped 2.6 percent after Moody’s on Wednesday reduced its credit rating to three levels below investment grade.

The specter of another near-term credit-rating cut is damping optimism that Rousseff is getting closer to being ousted. Many investors see an impeachment as a potential solution to gridlock in Brasilia that has diverted the nation’s focus from fiscal and economic measures needed to stabilize finances and restore growth. Moody’s typically concludes its reviews in 90 days, analyst Samar Maziad said in an interview Wednesday.

The day before, lawmakers approved the opposition’s list of nominees for a committee that will discuss whether to seek Rousseff’s ouster. Hours later, Brazil’s Supreme Court suspended the formation of the committee. The 65-member panel is supposed to hear Rousseff’s defense and recommend whether the full lower house should allow impeachment hearings to start in the Senate.

“Some investors feel like the only way out for Brazil is with Rousseff out,” said Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, rose 0.27 percentage to 15.98 percent.

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