Petrobras Is Tanking, And It's Dragging Brazil Down With It

Brazil’s quasi-state oil company, Petrobras, is getting pounded, falling around 6% in Monday’s trading day.

The stock is down 40% year to date.

As Petrobras falls it’s taking Brazil’s stock market — the Bovespa — down with it. The index is down 3.6%.

The MSCI Brazil ETF is also down 3.2%, Petrobras, with a market cap of $US54 billion is heavily weighted in the index, which also includes Brazil’s currency, the real.

Unfortunately, this is the last thing Brazil needs right now. Some analysts estimate that when all is said and done this year, Brazil will have grown 0%. Inflation is high and corporate margins are thin. Gross government debt is expected to balloon unless action isn’t taken.

President Dilma Rousseff narrowly won an election against a pro-market, reform candidate Aecio Neves in October. Since then she has switched up her economic team in an effort to cut costs and bring about reform.

Her new Finance Minister, Joaquin Levy, is also known as “Scissorhands,” if that’s any indication, and he’s already started talking about a number of austerity measures meant to bring the country back on track.

But they’re going to hurt.

Of course, Petrobras’ problems go beyond anything a Finance Minister can fix. Its costs have increased while production has not. It’s taken on around $US95 billion in debt.

Another reason why the company’s revenue has been anemic is that the government was giving Brazilians subsidies on their energy consumption, undercutting Petrobras’ domestic revenue.

Short-seller Jim Chanos called the company “a scheme not a stock.”

To make matters worse, Petrobras executives are also being investigated for all sorts of corruption — from kickbacks to outright using company money to fund political activity.

President Dilma Rousseff, once a board chair of the company, said the far-reaching corruption scandal could “change Brazil forever” if heads roll. So far she has not been implicated. However, officials have raided offices and taken dozens of wealthy, powerful Brazilians into custody.

Like we said, bad timing.

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