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By Hillary Flynn and Davide Scigliuzzo
NEW YORK, Dec 16 (IFR) - Brazil's sovereign bonds and credit default swaps widened dramatically Wednesday after Fitch stripped the country of its investment-grade credit rating and lowered it to junk.
The widening reflected deepening worries about Brazil, where months of political turmoil and a corruption scandal at state oil giant Petrobras have hampered efforts to revamp the economy.
Finance Minister Joaquim Levy said that Fitch's downgrade to BB+ was "serious" and remained silent when reporters asked if he would continue to keep his job.
S&P demoted Brazil to BB+ in September, and while a second downgrade had already been priced in by much of the market, the sovereign's bonds and CDS still took a hit in secondary trading.
Five-year CDS - a measure of the cost to insure bonds against a default - became more expensive, widening 37bp to a mid-price of 491bp.
Meanwhile Brazil's US dollar bonds were 2.5 to 3.5 points lower at midday after dropping as much as 4 points on the news, one LatAm bond trader in New York told IFR.
"The sovereign is getting hit hard but we are bouncing off the lows," he said.
Brazil's 2025 were quoted at a mid-price of 82, while the sovereign's 2045s were heard at 67, he said.
Thousands of protesters have been taking to the streets in Brazil to demand the impeachment of President Dilma Rousseff, who has struggled to right Latin America's largest economy.
Her government has cut the fiscal savings target for 2016, renewing worries about the administration's ability to grapple successfully with a mountain of overhanging debt.
Moody's, the only one of the three major agencies still holding an investment-grade rating on Brazil, put it on review for a downgrade to junk last week.
In a statement Wednesday, Moody's said that the cut in the savings target showed the country's ability to deliver a surplus big enough to stabilize its debt ratios was "diminished".
There are also concerns about the impact on Petrobras, where a corruption inquiry has limited its ability to raise fresh capital in the face of plummeting crude oil prices.
"There is clearly a risk for Petrobras," one investor told IFR, while saying that this may also have been priced in by the market for some time.
"Raising financing would have already been very expensive for Petrobras, and I am not sure this changes that."
And while two junk ratings normally occasion a sell-off by investors mandated only to have investment-grade holdings, most holders of Brazilian debt do not have that mandate.
"To a large extent it's held by more portfolios dedicated to emerging markets that don't have a ratings requirement," one banker said.
Barclays analysts estimate net forced selling to the tune of US$1.6bn as Brazil moves to high-yield status. Investment-grade and Crossover investors would likely be forced sellers, but global high-yield funds would help offset that, they said. (Reporting by the IFR team; Writing by Hillary Flynn; Editing by Marc Carnegie)