(Adds analyst comments, background on recent ratings moves)
By Bruno Federowski and Brad Haynes
SAO PAULO, Dec 9 (Reuters) - Moody’s Investors Service put Brazil’s credit rating on review on Wednesday for a possible downgrade to junk status due to a severe economic recession, failed austerity efforts and rising risks of political paralysis.
If Moody’s follows through with a downgrade in the usual three-month review period, it would be the second ratings agency to strip Brazil of its investment-grade status, following a cut by Standard & Poor’s in September.
Fitch ratings also cut Brazil’s rating to the brink of junk in October and left it with a negative outlook as government finances deteriorated in a deepening recession.
A second downgrade to junk is likely to trigger capital outflows because many foreign pension funds and other large investors are required to unload bonds once two separate agencies rate them as speculative grade.
A Moody’s downgrade could drive some $1.6 billion of investments out of the Brazilian market, estimated Barclays economist Bruno Rovai.
The Brazilian real plunged to a record low in September after the S&P downgrade to junk, but the currency rebounded more recently as fears of sudden capital flight eased.
“The impact is negative because of the obligatory adjustment among funds, but ... a good part of that foreign adjustment has been made by markets,” said Juliano Ferreira, a strategist with the Icap brokerage in Sao Paulo.
“The volume of dollars that could leave the country due to a downgrade isn’t what it would have been in the past,” he added.
Moody’s said it had taken the decision due to “rapidly and materially deteriorating macroeconomic and fiscal trends and diminished likelihood of trend reversal in the next 2-3 years.”
Economic data last week showed Brazil’s economy contracted 4.5 percent in the third quarter from a year earlier, confirming the worst recession in 25 years as investment plunged and inflation jumped above 10 percent per year.
Moody’s said it also based its decision on “worsening governability conditions and increased risk of policy paralysis,” after Congress opened impeachment proceedings against President Dilma Rousseff, who has struggled to pass an unpopular austerity package. (Reporting by Brad Haynes and Bruno Federowski; Editing by Sandra Maler)