NEW YORK, Aug 31 (IFR) - Brazilian credits took a beating on Monday as reports that the government has budgeted a primary deficit in 2016 dented investor confidence in the ability of President Dilma Rousseff to preserve the country's investment-grade rating.
After abandoning plans to revive an unpopular tax on financial transactions, Rousseff will submit to Congress a budget that shows government revenues falling short of spending before interest payments in 2016, a government official told Reuters on Monday.
The decision is the latest sign of the difficulties faced by the Rousseff administration in plugging a widening fiscal gap, which rating agencies see as a necessary condition to keep their investment-grade ratings on the country's debt.
"If we don't get a level of political cooperation that results in better medium-term fiscal policies the likelihood of a downgrade is pretty close to inevitable over the next three months," said James Barrineau, co-head of emerging markets debt at Schroders.
"The rating agencies are trying to bend over backwards to give Brazil the benefit of the doubt."
Brazil's five-year credit default swaps widened by nearly 20bp on Monday morning to a spread of 349bp-356bp, according to Markit before retracing somewhat.
The sovereign's cash bonds were also performing poorly, particularly at the long end, where the 2041s dropped 1.25 points to 88.5-89.0, according to a New-York based trader.
Elsewhere in the region, Venezuelan bonds appeared to find some buyers after lagging a rally in crude at the end of last week helped by demand from real money accounts.
Bonds issued by the sovereign and by state-run oil company PDVSA were between half and a full point higher in price at the belly, according to the trader. (Reporting by Davide Scigliuzzo; editing by Shankar Ramakrishnan)