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Friday, 21 June, 2002, 06:18 GMT 07:18 UK
Brazil hit by debt downgrade
The real has slumped in recent weeks
Confidence in Brazil's economy was dealt a further blow when international credit rating agencies gave it a pessimistic bill of health.

Credit rating agency Moody's - which assesses the ability of borrowers to repay their debt - cut its outlook on Brazilian government debt to "negative" and Fitch's downgraded its rating as well.

Stocks tumbled and the currency, the real, slumped in value.

Both agencies noted that the problem was a matter of sentiment: October elections could gift the presidency to a socialist, Lula da Silva, and that - they believe - could undermine investor confidence in the stability of Brazil's debt.

Lower ratings effectively mean that borrowers have to pay higher interest rates - to compensate lenders for the perceived greater risk of default.

All in all, the criticism was not the best of news in a fiercely superstitious country less than a day away from a key World Cup clash on Friday morning against England.

Sentiment

The government, unsurprisingly, played down the doubts.

"The Brazilian economy is solid, democracy stable and we live in a climate of economic tranquillity," vice president Marcos Maciel told reporters.

And analysts agreed that the country was being caught in the backwash of worries about emerging markets, rather than suffering because of real economic fundamentals.

"The sensation is that market dynamics are starting to create credit dynamics, and not the other way around," said Mark Siegel, emerging markets fund manager at DL Babson & Co.

"If that's the case, then Brazil's challenge will be harder to manage than most of the market is prepared for."

New man

Certainly the challenge looked genuine on Thursday, as the Rio stock market slid more than 5%, the worst one-day fall since 13 September.

At the same time, the real slipped 7 centavos to close at 2.77, despite massive government intervention.

And the yield on Brazil's government bonds - the premium promised buyers to persuade them to invest - shot up 10%.

The market worry is that if Lula da Silva gets in October - and current polls show him with twice the 19% garnered by the government's candidate - renegotiation of Brazil's $90bn debt will be high on the agenda.

"Renegotiation" is taken in some quarters to mean default, following eight years of heavy spending and a consequently ballooning deficit.

See also:

21 Jun 02 | England v Brazil
18 Jun 02 | Business
13 Jun 02 | Business
13 Jun 02 | Business
12 Jun 02 | Business
28 Dec 01 | Business
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