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As Corruption And Oil Production Rule, Moody’s Cuts Brazil’s Rating

As a political crisis, which may include bribing of government official, and the crippling of oil giant Pertrobras (NYSE: PBR} for some of the same reasons, Moody’s downgraded Brazil’s debt to Baa3 from Baa2. Among the primary drivers were not the scandal, but the level of debt the country has created

The drivers of the rating change are:

1. Weaker-than expected economic performance, the related upward trend in government expenditures and lack of political consensus on fiscal reforms will prevent the authorities from achieving primary surpluses high enough to arrest and reverse the rising debt trend this year and next, and challenge their ability to do so thereafter.

2. As a result, government debt burden and debt affordability will continue to deteriorate materially in 2015 and 2016 relative to the rating agency’s prior expectations, to levels materially worse than Brazil’s Baa-rated peers. Moody’s expects the rising debt burden to stabilize only towards the end of this administration

And, the situation could worsen:

The rating could come under additional pressure if government debt metrics were to deteriorate further and faster than Moody’s expects, and if the rating agency were to conclude that Brazil was unlikely to achieve the growth and fiscal consolidation needed to ensure fiscal sustainability over the medium term. In Moody’s view, Brazil needs to achieve GDP growth and primary surpluses of at least 2% of GDP during the second part of this administration to arrest the rise in debt and provide assurance of fiscal sustainability beyond the span of this administration. A negative outcome would likely be associated with a collective failure on the part of Brazil’s fiscal and monetary authorities to set out and achieve clear, supportive policy objectives coupled with a higher-than-expected level of political instability.

Not terribly long ago, Brazil was one of the BRIC nations–Brazil, Russia, India and China. With the exception of India, the belief that these nations would drive the global economy is gone

By Douglas A. McIntyre