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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.
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, ending the day 35bp wider at a mid-price of 490bp, according to Markit data.
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.
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.
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."
Barclays analysts estimate net forced selling to the tune of US$1.6bn as Brazil moves to high-yield status.
Elsewhere in the region, Argentine President Mauricio Macri was expected to announce a much anticipated relaxation of currency controls late Wednesday, setting the stage for a weakening of the peso.
Argentine bonds were ending the day 3/4 of a point to a point higher in cash in anticipation of the announcement, according to a New York-based broker. (Reporting by Davide Scigliuzzo)