Brazil is officially junk

Standard and Poor’s has cut Brazil’s credit rating down to junk.

That means it has downgraded the country’s sovereign debt to below investment grade status, marking it out as a riskier investment. The country had enjoyed an investment grade status since April 2008. 

Once a darling of the emerging market economies, Brazil has been battered by low commodity prices and high inflation.

Geert Aalbers and Thomas Favaro at consultancy Control Risks said in a note on Thursday: “While other ratings agencies have yet to follow suit, the news is still a blow for Brazil’s already reeling economy, which has shrunk over the last two quarters and appears increasingly likely to underperform even the 2% contraction most economists have forecast for 2015.”

This downgrade is more about political chaos than anything else. Brazil is going through what can only be considered an identity crisis.

Under former President Luis Inacio Lula da Silva in the early 2000s, the country started to believe that it could clean up political corruption, bring more people into the middle class, and build its status on the global economic stage. High commodities prices made it rich.

Then a year ago “Operation Car Wash” went down, and suddenly the optimism that characterised the era of Lula turned into anger at his ruling party. Corruption, it seemed, was endemic. Brazil was not what it thought was.

Ibovespa car wash brazilYahoo FinanceBrazil’s Ibovespa stock market

Operation Car Wash was a nation-wide sting that ensnared the most powerful people in the country’s business and political circles. It showed that the ruling party — Lula’s party, now headed by current President Dilma Rousseff — was using Petrobras, the $US40 billion state oil company, as its personal piggy bank.

Famed short-seller Jim Chanos, who shorted Petrobras, called it a “scheme not a stock.”

The sting revealed years of corruption involving piles of cash, private planes, kickbacks and favours. Petrobras stock fell 50% between the sting in August 2014 and the beginning of 2015 when it stabilised a bit. It took the rest of the stock market down with it. 

When commodities started crashing again later in 2015 Petrobras went with it, and with Petrobras went the entire Brazilian stock market. 

The Brazilian people took to the streets by the hundreds of thousand, some calling for the unthinkable — a return to the military junta that terrorised the country from the 1960s to the 1980s. President Rousseff’s approval rating fell to 7%.

Aalbers and Favaro said: “The “car wash” corruption scandal, which implicated senior government officials and the leaders of more than a dozen major companies in a bid-rigging scheme, has sapped President Dilma Rousseff’s administration of any political capital; raising questions about whether she can complete her term.”

The market only sees disaster ahead.


NOW WATCH: 13 Surprising Facts About Brazil

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.