NEW YORK, Feb 24 (IFR) - Brazilian credit markets were opening weaker on Wednesday following Moody’s decision to downgrade Brazil to Ba2 from Baa3 with a negative outlook.
Brazil five-year CDS was starting the day about 7bp wider at 467bp-477bp , while the sovereign’s benchmark 2025 had slipped about 40 cents to be quoted at 83.45-83.85.
“Brazil is down but for now it is contained,” said New York based trader.
Moody’s downgrade may have come sooner than some had expected, but it was largely priced in and only reconfirms investors’ views toward the country’s deteriorating economic scenario.
Moody’s is the last of the major rating agencies to knock Brazil off its investment-grade perch and hence won’t trigger any forced selling of a credit that already has two junk ratings.
As justification for its move, the rating agency cited a deterioration of the country’s credit metrics and the difficulties of passing necessary fiscal reforms amid a challenging political environment.
The rating agency now expects the country’s debt burden to exceed 80% of GDP over the next two years and GDP growth to average -0.5% between 2016 and 2018.
“We expect interest rates to remain elevated in real terms, which will contribute to low debt affordability with interest payments accounting for more than 20% of government revenues,” it said.
Moody’s follows S&P’s decision just a week ago to cut the sovereign’s rating to BB from BB+ with a negative outlook.
“It is not constructive when there is a negative ratings migration on top of a weak global backdrop at the open but it is not catastrophic,” said the trader.
The move comes on a weaker start for the region overall as another drop in crude prices sends broader markets lower on Wednesday. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)