Friday, October 16, 2015

Brazil: Risk of a second downgrade to junk rises above 50% – TDS

FXStreet (Córdoba) - Cristian Maggio, Head of Emerging Markets Strategy at TD Securities analyzed the downgrade of Brazil’s credit rating of Fitch to BBB- and kept the outlook negative. According to him, Brazil’s risk of a second downgrade to junk has clearly risen over 50%.

Key Quotes:

“What is most concerning about Fitch’s decision is that the outlook remains negative, highlighting the concrete risk of further downgrades in the coming months. In theory, this should not be before 2016, but the local situation – especially political – remains so fluid that rating agencies may decide anytime to reassess the prospects of the country and pull the ratings down another few notches."

“So what happens if and when Brazil becomes a full-fledged (from at least two major agencies) junk rated sovereign? Indexed investors will start unwinding their positions as Brazil is expelled from global bond indices. So adjustments are likely to happen even if the CDS market is even more pessimistic than ratings at this stage. What should not happen, however, is another downgrade in 2015. But it remains a high-risk call and only a few will and should bet on such an outcome.”

“So, as said at the beginning, the race for Brazil to retain IG is a high stake game that will not find many who want to bet on it. But while this means the market remains net short of Brazil, or simply not involved there at all, it also highlights the limited margin for further deterioration unless extreme scenarios materialize. At the least in the medium term, this should improve the risk-reward ratio of being positioned for more improvement (or lesser deterioration) than currently priced in by the market.”
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