Brazil traders find silver lining in rating downgrade by Moody’s

Filipe Pacheco and Julia Leite – Bloomberg, 8/11/2015

Moody’s Investors Service cut Brazil to the cusp of junk on Tuesday, and it was the first piece of good news investors had heard in a while.

The company’s decision to assign a stable outlook to Brazil’s rating, now at the lowest level of investment grade, was welcomed by traders who had been widely anticipating a negative outlook. The real pared losses, futures on the Ibovespa stock gauge jumped higher, and local bonds gained.

Brazilian assets sold off in recent weeks on speculation the country was veering closer to a junk rating after the government lowered its fiscal target amid the country’s worst recession in 25 years and a growing political crisis. While Moody’s says debt levels will keep rising to about 70 percent of gross domestic product by the end of President Dilma Rousseff’s term, a flexible exchange rate and plenty of reserves mean a cut to below investment grade isn’t imminent.

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