The Inescapable Trap of the ‘Dollar Short’ – – – Brazil Edition

For bond ratings agencies, finding a bottom is pretty much their job. In other words, they are supposed to map out and understand, as best as may be possible through regressions and equations, the forces that might define a worst case. By direct implication, a worst case probability is determined by at least some ray of hope, some perhaps buried light at the end of a tunnel.
Brazil has been downgraded rather regularly in the past few months. On December 16, Fitch downgraded the country’s sovereign debt to junk, BB with a negative outlook. Earlier in September, S&P had already cut its ratings on Brazil to junk, the first to effectively unwind what Brazil’s rapid rise in the 2000′s had seemingly delivered: investment grade status achieved notably in 2008 and more than that, recognition of economic and financial maturation. The events of 2015 tellingly no longer just threaten to unwind the progress, they are actively exposing the fable behind it all along.
Not be left out, Moody’s on December 9 placed Brazil on ratings watch for its own downgrade undoubtedly to junk, presenting the South American former powerhouse a glimpse of the full ratings trifecta. The reasoning was and is entirely simple; nobody can see a bottom.
Fiscal and economic activity indicators continue to sharply deteriorate with no clear sign of when they will bottom out. Rapidly and materially worsening macroeconomic conditions are leading Moody’s to reevaluate the extent to which the fiscal and economic performance will conform to the assumptions supporting Brazil’s rating at Baa3. The likelihood of a turnaround in Brazil’s economic and fiscal performance now appears unlikely in 2016, and the key assumptions underlying our Baa3 rating – a return to GDP growth of around 2% and a primary surpluses [sic] of a similar magnitude beyond 2016 – also appear to be at risk.
What Brazil is facing right now is in almost every way worse than the Great Recession. Already there are comparisons inside Brazil to the Great Depression. It may not be yet that far along, but everything is continuing month after month in that direction which can only leave observers wondering when.

This post was published at David Stockmans Contra Corner on December 30, 2015.