RIO DE JANEIRO—Brazil lost its coveted investment-grade credit standard in the eyes of one major ratings firm on Wednesday, dealing a blow to the government’s credibility with investors and threatening to aggravate the country’s worst economic downturn in 25 years.
Standard & Poor’s Ratings Services downgraded Brazil’s sovereign debt by one notch to BB+, placing it in junk territory for the first time since 2008. Citing political challenges to the Brazilian government’s efforts to balance its budget, S&P also maintained a negative outlook, indicating at least a 1-in-3 chance of further downgrades.
The move came sooner than was widely expected, reflecting the speed with which Brazil’s economic and fiscal conditions have deteriorated in recent weeks. If matched by another credit-ratings firm, the downgrade could trigger a massive outflow of cash from Brazilian financial markets, as big international pension funds often invest only in assets rated as investment class by at least two of three major firms.
The downgrade by S&P represents a significant setback for President Dilma Rousseff, who has sacrificed her popularity by pushing an agenda largely aimed at saving Brazil’s hard-won status as a trustworthy debtor. Since winning re-election last year, the left-leaning Rousseff has disappointed core supporters by raising taxes and cutting discretionary spending during a deep economic downturn. Her approval ratings have plummeted into the single digits.