Real Sinks With Bank Stocks After Brazil Cut Further Into Junk

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  • S&P cites lack of progress on measures to reduce deficits
  • Turmoil seen continuing even after impeachment verdict

The real declined and Brazil’s bank stocks slumped after Standard & Poor’s cut its ratings for the government and some of the country’s largest companies, saying that a shrinking economy and political gridlock is making investments riskier.

The currency dropped 1 percent to 4.0295 per dollar in Sao Paulo, while the Ibovespa stock gauge slipped for the first time in five days. A gauge of financial shares in Brazil was the worst performer among 10 industry groups as Itau Unibanco Holdings SA and Banco Bradesco SA led declines after two dozen lenders had their credit grades lowered by S&P.

Brazil’s real is the worst performing major currency in the past year and the Ibovespa is among the 10 biggest losers globally when measured in dollars as the country struggles to pull itself out of the deepest recession in more than a century and curb a widening budget deficit. The tumble in prices for the commodities that Brazil exports comes as an effort to impeach President Dilma Rousseff diverts lawmakers’ attention from measures that analysts say are needed to rein in the country’s biggest budget deficit on record.

"Politics, the sovereign downgrade and ever-weakening economic numbers in Brazil are fueling volatility in the currency," said Joao Paulo de Gracia Correa, a foreign-exchange director at SLW Corretora de Valores in Curitiba, Brazil. "Brazil is a very complicated package right now and the current scenario favors the outflows."

Credit Suisse Group AG cut its estimate for the Ibovespa by the end of this year to 50,000 from 54,000, while maintaining its underweight stance on Brazil. Among other factors, the bank cited the fact that the fiscal situation hasn’t improved and that inflation has been persistently higher than expected. The new target for the stock benchmark still implies a rally of more than 20 percent.

S&P cut Brazil a step further into junk territory on Wednesday, giving it a BB grade with a negative outlook, meaning another cut could be in store for the country. The rating puts the creditworthiness of Latin America’s largest economy on par with countries including Bolivia, Paraguay and Guatemala.

S&P was the first ratings company to increase Brazil’s classification to investment grade in April 2008. Brazil lost its investment-grade rating from S&P in September, and Fitch Ratings cut it into junk territory in December, with a negative outlook. In December, Moody’s Investors Service put the country’s Baa3 rating, the lowest level of investment grade, on review for a cut.

"While investors don’t need S&P to remind them how dire things are, the further downgrade shows the extent to which Brazil’s creditworthiness is suffering from the economic and political crises," said Nicholas Spiro, a partner at London-based Lauressa Advisory Ltd.

Brazil’s $4.3 billion of overseas bonds due in 2025 slipped 0.39 cent to 82.70 cents on the dollar. The Ibovespa dropped 0.4 percent to 41,477.63. Itau and Bradesco each dropped 2 percent while the MSCI Brazil Financials Index fell for the first time in four days.

"Funding costs for banks have been increasing in the past months because of the deterioration of the situation in Brazil and should rise more after this downgrade,” Daniel Weeks, an economist at Garde Asset Management, said from Sao Paulo. "The situation of the Brazilian economy is deteriorating very fast, so more downgrades are expected."

Steelmaker Usinas Siderurgicas de Minas Gerais SA was the worst performer on the Ibovespa as the company’s quarterly loss exceeded estimates. Shares slumped 13 percent.

Meatpacker JBS SA fell 3.5 percent after its global Chief Executive Officer, Wesley Batista, said the company is not interested in making acquisitions in the retails sector. Shares had jumped 13 percent this week through Wednesday after newspaper O Globo columnist Lauro Jardim reported, without saying how he got the information, that the company was planning to buy cosmetics maker Natura SA and supermarkets chain Cia. Brasileira de Distribuicao.

Online retailer B2W Cia. Digital surged 11 percent, the most since Oct. 6.

Impeachment proceedings against Rousseff could take at least until the third quarter, imperiling the outlook for a quick fix to the country’s fiscal woes, according to Barclays Plc economist Bruno Rovai. S&P could downgrade the country again this year as the administration’s support base is eroding, he wrote in an e-mailed note.

Brazil’s “fluid political dynamics and inconsistent policy initiatives” mean there is a greater than one-in-three chance it will lower the rating again, S&P said.

Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, rose 0.08 percentage point to to 14.32 percent.