So S&P has downgraded Brazil’s rating on long-term foreign currency debt to junk and lowered its long-term local currency sovereign credit rating to ‘BBB-‘ from ‘BBB+’. What does this tell us? To begin with, credit rating agencies have repeatedly been wrong.
The same agencies that rated Enron investment grade just weeks before it went bust, the same people that assigned triple A rating to toxic subprime mortgage-backed securities are now downgrading Brazil sovereign debt. As the FCIC report pointed out “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.” (FCIC 2011)
After all, should you take the credit rating agencies seriously? The answer is no. Brazil is a net external creditor, that is, though the federal government has debt denominated in foreign currency, it holds more foreign currency assets (figure 1) than it owes in foreign currency debt (figure 2). Brazil’s public sector can pay all of its long-term financial obligations denominated in foreign currency. Moreover, Brazil’s federal government can never become insolvent on obligations denominated on its own currency (note that since 1999 Brazil maintains a floating exchange rate regime, which increases domestic policy space).....New Economic Perspectives
Credit Rating Agencies and Brazil: Why The S&P’s Rating About Brazil Sovereign Debt Is Nonsense
Felipe Rezende | Assistant Professor of Economics, Hobart and William Smith Colleges
