S&P’s Brazil downgrade: why it matters

Shannon K. O’Neil – Council on Foreign Relations, 4/3/2014

In a widely expected move, the ratings agency Standard and Poor’s (S&P) downgraded Brazil’s long term debt from a credit ranking of BBB to BBB- on March 24, bringing the country’s sovereign bonds a step closer to losing their “investment grade status” (defined as BBB- or above) and becoming “speculative” or “junk bonds.” The rating stems from a combination of indicators—including GDP growth, inflation, and external debt—that S&P uses to measure a country’s creditworthiness and its fiscal, regulatory, and political risks.

Since the turn of the twenty-first century, Latin America’s overall credit ratings have trended upward. By Fitch’s rating system, twelve out of fourteen Latin American countries have higher ratings today than a decade ago, one stayed put, and only one fell in the credit ranks. Chile sits at the top, reaching S&P’s AA- status (AAA status is the highest possible) in late 2012, on par with Japan and just above Israel. Mexico ranks next with a BBB+ rating (bumped up after its ambitious reforms passed); Peru too rates BBB+. At the bottom is Argentina with a CCC+ rating, improved from DDD after its 2001 default.

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