Brazil stripped of investment grade rating as crisis deepens

Brazil lost its coveted investment-grade rating on Dec. 16 after Fitch became the second credit agency to downgrade the country's debt to junk status, citing concerns about an economic and political crisis threatening to topple President Dilma Rousseff.

Fitch downgraded Brazil to BB+ with a negative outlook less than 24 hours after the left-leaning Rousseff moved to loosen next year's budget targets in a bid to safeguard spending for welfare programs. The decision undercut her orthodox finance minister, Joaquim Levy who staked his reputation on an austerity agenda that has now stalled in Congress.

Levy blamed the government's abandonment of targets needed to cut debt for Fitch's decision.

"Obviously the goal of zero (debt reduction) is very bad and resulted in the downgrade," he told Band News TV on late Dec. 16.

The real currency and dollar-denominated bonds tumbled amid forced selling after the downgrade, which came just three months after Standard & Poor's cut Brazil's rating to junk, further clouding the outlook for an economy reeling from its sharpest downturn in a quarter-century.

Investors barred from owning junk bonds could dispose of about $20 billion in Brazilian sovereign and corporate debt after two agencies downgraded Brazil, analysts at JPMorgan Securities estimated in October.

It marked a bitter reversal for Latin America's largest economy, seven years after a commodities-fueled boom helped propel it to investment-grade status, feeding expectation that its economy would escape sharp cycles of boom and bust that has kept millions in poverty.

Fitch said a deepening political crisis had restricted the government's ability to right the economy. Rousseff's opponents have accused her of...