RIO DE JANEIRO, Sept 11 (Reuters) - Standard & Poor's decision to strip Brazil of its investment-grade credit rating puts pressure on competing ratings firms to follow suit, but the government still has time to avert another downgrade to junk which would cost billions of dollars in foreign investment.
While many analysts consider it a matter of time before Fitch Ratings or Moody's Investors Service also cut Brazil to a "junk" or speculative rating, both agencies have signaled they are in no rush to make that move.
President Dilma Rousseff needs time to draw up and build a political consensus for unpopular budget cuts, especially as the economy is in its worst recession in a quarter century.
A second downgrade to junk would have greater market impact than the first one because many foreign pension funds and other large investors are required to unload bonds once two separate agencies rate them as speculative grade.
The move would also knock Brazilian assets out of benchmark high-grade indexes tracked by passive funds, whose goal is to merely match the performance of an index.
JP Morgan estimates passive investors would be forced to sell $1.5 billion worth of foreign debt issued by Brazilian companies and $800 million worth of sovereign debt. Overall, it estimates both active and passive investors yanking $20 billion out of sovereign and corporate debt.
Fitch Ratings, which currently rates Brazil two notches above junk level, said on Thursday that there are still "elements" supporting the country's investment grade even as the rating deteriorates.
Those include Brazil's economic diversity, per capita income levels and the government's net creditor position, "which remains the strongest in the triple-B category," Fitch analyst Shelly Shetty said at a conference in New York.
Her remarks practically ruled out the possibility of a two-notch downgrade for Brazil in coming months, suggesting that Fitch will likely cut the country's rating to BBB-minus, its lowest investment-grade level.
The agency could keep a negative outlook on the new rating, but that would still give Brazil some time before an actual downgrade to junk.
Moody's downgraded Brazil to the brink of junk just a month ago, but it assigned a stable outlook on the new rating, saying Brazil's investment grade was safe for now.
Over time, the ratings assigned to Brazil by the "big three" agencies will likely converge, analysts and investors said. Pressure on Fitch and Moody's will mount if S&P downgrades Brazil deeper into junk territory, a possibility indicated by the negative rating outlook it assigned on Wednesday.
"The first aftershock of the S&P decision is that it creates a competitive situation between credit rating agencies, which means the current ratings misalignment will not last for long," said Jorge Simino, who oversees 23 billion reais ($6 billion) at Brazilian pension fund Fundacao Cesp.
Reporting by Walter Brandimarte; Additional reporting by Guillermo Parra-Bernal; Editing by Kieran Murray and W Simon