Brazil's downgrade sparks concerns over forced selling
By Paul Kilby
NEW YORK, Sept 11 (IFR) - Pessimism about Brazil deepened this week after Standard & Poor's downgraded both the sovereign and Petrobras to junk status, reigniting fears of forced selling in a country sinking fast into high-yield territory.
The other agencies are expected to follow suit soon, further clouding the picture for Brazil, which is undergoing its worst economic crisis in decades.
"We shouldn't underestimate the follow-up impact we could see when Fitch or Moody's converge with S&P," said Patrick Esteruelas, a sovereign analyst at Emso.
"(It) will induce some additional forced selling as the sovereign and corporates drop out of the investment-grade indices."
S&P dropped Brazil to BB+ from BBB-, citing a "lack of cohesion" in President Dilma Rousseff's cabinet and the uncertainty surrounding the Petrobras corruption scandal.
Analysts now expect Moody's to drop the outlook on its Baa3 Brazil rating to negative and then downgrade the sovereign to Ba1 early next year.
The more conservative Fitch still rates Brazil at BBB, but is expected to downgrade it this year to BBB-, with a negative outlook.
JP Morgan estimated last month that Brazil's full downgrade to junk would result in about US$6.2bn in forced selling among investors who hold US$32.2bn of hard-currency sovereign bonds. Continuación...