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Brazil Central Bank tries to block real plunge

A trader works at XP Investimentos brokerage in São Paulo, Brazil.
A trader works at XP Investimentos brokerage in São Paulo, Brazil.
A trader works at XP Investimentos brokerage in São Paulo, Brazil.
Vows to sell as much as US$1.5 billion after S&P downgrades country to ‘junk’ status

SAO PAULO — Brazil’s Central Bank said yesterday it was ready to sell as much as US$1.5 billion on the spot market through repurchase agreements to support the real as the country’s currency and financial markets plunged after Standard & Poor’s cut the country’s sovereign rating to junk.

The drop from investment grade, which came sooner than many in the market had expected, reflected President Dilma Rousseff’s struggle to regain investor confidence as political turmoil drives a growing government deficit in Latin America’s largest economy, which is also suffering from recession and growing unemployment.

Brazil’s currency, the real, fell nearly three percent to 3.9 per US dollar, a 13-year low, before backing off to 3.86 per dollar, still 1.5 percent down on the day, after the Central Bank intervened.

The currency has fallen more than 30 percent against the dollar this year as investors doubt the government’s ability to shore up its finances and pull the economy out of its worst recession in 25 years.

Assets began to pare losses in late morning trading as the downgrade had been largely priced in, following an initial trajectory to that of the real.

“Everyone knew the downgrade was coming but the fact that it came so quickly scared some people,” said Andre Perfeito, chief economist with Gradual Investimentos in São Paulo.

He added: “People are looking to Brasilia for some kind of plan but for now there is nothing to calm the market.”

Shock felt in Europe

In Brazil, the benchmark Bovespa stock index down about 1.3 percent.

Companies whose earnings are primarily in dollars, such as mining firm Vale and pulp producer Fibria Celulose both lent support to the index, helping offset a 4.5 percent drop for state-run oil producer Petroleo Brasileiro, known as Petrobras.

Petrobras and other heavily indebted companies such as airline Gol Linhas Aereas led losses on the Bovespa due to concerns about higher borrowing costs after the credit downgrade.

Brazil’s interest-rate futures jumped in opening trade. Yields paid on interest-rate contracts expiring in January 2023 rose 52 basis points to an all-time high of 14.76 percent.

European shares retreated overall as a consequence of S&P’s move, as companies exposed to Brazil came under selling pressure.

French retailer Casino Guichard, which got about half its 2014 revenue from Latin America, fell 6.2 percent. Edenred generates around half its profit from Brazil; it fell 4.8 percent. Supermarket Carrefour, which gets 14 percent of its annual sales from Brazil, fell 3.3 percent.

Other companies that have a significant presence in the country, such as Seadrill, Banco Santander, Anheuser-Busch InBev, British American Tobacco, Galp Energia and Unilever, slid 0.9 to 8 percent.

“Companies which are heavily exposed to Brazil are clearly not good plays as the resource-dependent economy is contracting and the much-needed investments are likely to get pushed back. All these issues make Brazil a less attractive place to do business,” Peter Dixon of Commerzbank said.

“If you are exposed to emerging markets, you have to try to find other markets that are doing better.”

Fitch still backs Brazil

Another hugely influential ratings agency, Fitch, came out yesterday with some support to Brazil’s outlook, saying it still sees elements supporting the country’s investment grade. Those were the words of a senior analyst with the ratings firm, easing market fears the agency could follow Standard & Poor’s decision to cut the country to junk.

Speaking at a Fitch conference in New York, analyst Shelly Shetty said that Brazil’s credit rating is deteriorating and that there is a greater than 50 percent chance it will be downgraded.

But a one-notch downgrade would still leave Brazil with investment grade, because Fitch currently has the country at BBB, or two notches above junk level, with a negative outlook.

“There are clearly elements which still buttress the investment-grade credentials,” Shetty told investors, citing Brazil’s economic diversity, per capita income levels, and the government’s net creditor position in dollars.

“That said, clearly the direction (of the rating) is negative and that is reflected in our outlook,” she said.

Brazil’s rating trajectory will greatly depend on political consensus about sound fiscal and macroeconomic policies, Shetty added. “This is a judgment one will have to form, whether or not this sort of consensus is going to remain in Brazil.”

As for Standard & Poor’s, analyst Lisa Schineller said on a conference call yesterday that it could revise the outlook for Brazil’s credit rating to stable if the country settles political issues that are holding back austerity measures.

Herald with Reuters, DyN, Télam, online media

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