Yesterday the already fragile emerging markets suffered a small storm with the reduction of Brazil’s rating by Standard & Poor’s. Moody’s, which reduced the rating of Brazil a month ago, assigns a rating to Brazil to a junk level, while Fitch put the country’s rating just two levels above that category. If any more of these agencies reduces the rating of Brazil to junk, many foreign institutional investors (such as the American pension funds) may be forced to sell Brazilian debt because their statutes prohibit them from holding bonds with a speculative rating. Following the decision by Standard & Poor’s the real depreciated against the dollar, while the Bovespa suffered in the initial phase, some selling pressure. Financial markets and the currencies of other emerging markets also traded in decline and the selling pressure also affected the shares of several European companies (Unilever, Carrefour, Galp, Banco Santander, etc.) exposed to Brazil. More relevant is the impact that this may have in the Brazilian economy and reflexively in other emerging economies. At a time when China is slowing and many emerging economies are struggling, Brazil’s situation worsens this whole context. Crises in emerging markets in 80’s and 90’s teach that if we reach a breaking point in any one of them, the domino effect in other countries is particularly quick and sharp.
