Background

Brazil’s seven years of investment-grade debt ended in August when Standard & Poor’s lowered the country’s credit rating to junk status. That month, the Brazilian government announced a 2016 fiscal deficit forecast of 30.5 billion reals, or about 0.5 percent of its gross domestic product. That compares with the country’s January 2015 targeted surplus of 2 percent and July revised objective of 0.7 percent.

“The political challenges Brazil faces have continued to mount,” S&P said in the statement accompanying its decision. “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.”

Brazil’s political challenges include the ongoing scandal surrounding state-owned Petroleo Brasileiro SA, the world’s most indebted oil producer, which faces allegations of corruption, and the possibility that President Dilma Rousseff could face impeachment.

The S&P move sent Brazil’s currency tumbling and, weeks later, the real remains one of the world’s worst-performing currencies. Then, as China’s economy slowed, investors moved to get out of developing markets — including Brazil — sending its stock market into bear territory after hitting a high point in May. Exacerbating the problem is the amount of foreign debt held by Brazilian companies, which is risky because of the weak real.

By late September, Brazilian bonds’ five-year credit-default swaps increased 44 basis points to 459 basis points, the highest level since October 2008. The extra yield investors demand to own the country’s benchmark dollar bonds due in 2025 instead of Treasuries jumped to 4 percent, the highest since the securities were issued in 2014. And swap rates on the contract maturing in January 2017 rose 0.14 percentage point to 15.75 percent.