Brazil, From Losing Investment Grade to...IMF Bailout [?!]

♠ Posted by Emmanuel in ,, at 9/10/2015 08:34:00 PM
Roussef is probably nostalgic about her Marxist guerrilla fighter days right about now.
The seemingly inevitable just happened: after being hit hard by slumping global commodity prices, Brazil's sovereign debt has been downgraded back to below investment grade or junk status by Standard and Poor's. In 2008 Brazilian IOUs became investment grade; by 2015 it's yesterday once more. Add in the corruption case hounding the Rousseff leadership and all-around economic malaise to complete the rather dire picture. From building BRICs to stumbling blocks, it seems:
The Brazilian government’s sovereign debt rating has been cut to junk status by one of the major credit agencies, ratcheting up pressure on President Dilma Rousseff to find a way out of the country’s economic and political crisis. Standard & Poor’s said in a note on Wednesday night that Brazil’s hard-fought investment-grade status was gone and that its outlook on the country was negative, just as the nation entered recession and was expected to see an even worse 2016.

That means it will be far more expensive for the Brazilian government to tap international credit markets and that much investor money, such as mutual funds that only plough money into investment-grade nations, will automatically be yanked out of the country. S&P said that extreme political challenges for Rousseff “have continued to mount, weighing on the government’s ability” to shore up its finances as promised...

The downgrade, while widely expected, came earlier than many analysts forecast and arrives at a time of extreme volatility for the Brazilian economy, with inflation hovering around 10% and unemployment the highest it has been in decades. Additionally, Rousseff has almost no political backing, with her approval rating in single digits, the worst seen by any leader since the nation’s return to democracy three decades ago. S&P said that “the negative outlook reflects what we believe is a greater than one-in-three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position”.
It now seems so long ago that Brazil had surmounted this seemingly regular lurch towards crisis. It was scheduled to host the World Cup and the Olympics to boot to show how times have changed. Apparently, many changes were just cosmetic. When the commodity surge receded, the same governance issues have reaffirmed themselves. How can it escape such a dire situation now? According to former Morgan Stanley man Stephen Jen, it's time for Brazil to turn back the clock in another way: take out an IMF bailout:
Stephen Jen has a proposal for Brazil to get out of the current economic mess: ask for a bailout from the International Monetary Fund. Not that Brazil needs the funding, said Jen, a former IMF economist. Latin America’s largest economy holds $371 billion in foreign reserves, almost 10 times the amount of the government’s foreign-currency debt.

But Brazil’s political system is in such disarray that the country can’t push through reforms needed to curb debt, tackle inflation and avoid more downgrades, according to Jen, the co-founder of London-based hedge fund SLJ Macro Partners LLP. Financial aid from the Washington-based IMF would require austerity measures such as tax increases and spending cuts, providing President Dilma Rousseff’s government with the political cover to implement unpopular measures needed to shore up the budget, he said.

“They cannot implement policies,” Jen said. “The whole system needs a cleanse. A quick way to bypass all these is to get the IMF. It’s a little wacky, but I think it makes so much sense.”
Strictly speaking, Brazil has built up substantial reserves over the years commodity prices were high, so there's little desperation for IMF loans. But, those reserves can go fast, and there is no guarantee for implementing political reform that the IMF would likely require for loan conditionalities.