Brazil’s downgrade to junk status this week by Standard & Poor’s, the credit rating agency, is not only a severe blow to investors, policymakers and citizens in Brazil, but it also opens the prospect of a wave of further downgrades across emerging markets, as credit spreads widen and investors become increasingly gloomy about a global economic slowdown.
“We are entering a different phase,” says Bhanu Baweja, emerging market strategist at UBS in London. “For the longest time we have thought that even if EM growth is weak, EM balance sheets, or their ability to service their debts, have been broadly OK. But now things are getting more serious.”
Analysts say the three main global rating agencies — S&P, Moody’s and Fitch Ratings — are increasingly basing their ratings decisions on broad macroeconomic criteria rather than on a country’s narrow ability to service its foreign currency sovereign debts, traditionally the agencies’ main focus.