(Adds background, reaction from government and analysts)
By Walter Brandimarte
SAO PAULO, Oct 15 (Reuters) - Fitch Ratings on Thursday cut Brazil’s credit rating to the brink of junk, warning the country could soon lose its coveted investment grade rating as government finances deteriorate amid a prolonged recession and persistent political uncertainty.
The decision, which is likely to increase borrowing costs for the government and Brazilian companies, piles pressure on President Dilma Rousseff to push crucial savings measures through Congress.
Yet additional austerity could sink Latin America’s largest economy deeper into recession, further weakening a government already crippled by political gridlock and mounting opposition from legislators.
Fitch cut Brazil’s rating to BBB-minus from BBB. It left a negative outlook on the new rating, suggesting it could become the second major rating agency to downgrade Brazil to junk within the next year or so.
A second move into junk territory would trigger further losses for Brazil’s economy, because it could force investors to sell some of their assets in the country.
“The negative outlook reflects Fitch’s view that economic and fiscal underperformance is likely to persist while political uncertainty could continue weighing on broader confidence,” Fitch said in a statement.
The uncertainty, Fitch added, would “delay a turnaround in investment and growth.”
The Brazilian real erased early gains and dropped about 1 percent following the decision, with analysts saying another downgrade is likely in the next few months.
“Fitch is giving us some time to advance in the direction of the necessary fiscal adjustments,” said Carlos Kawall, chief economist with J.Safra bank in Sao Paulo. “But they’re not going to wait a whole year, it’s very clear that their patience is shorter.”
An official at Brazil’s Finance Ministry said it was “terrible” that Fitch kept a negative outlook on Brazil’s rating. A Rousseff aide said the downgrade is a “matter of concern.”
The officials requested to remain anonymous because they are not authorized to discuss the matter publicly.
The Rousseff aide noted Congressional footdragging on proposed tax hikes and spending cuts aimed at raising 65 billion reais ($16.8 billion) to bridge a gap in next year’s budget. With increasing cries from the opposition in favor of Rousseff’s impeachment over alleged accounting irregularities, legislators have sat on the proposals.
“We hope the downgrade puts some pressure on Congress,” the aide said.
Fitch’s decision comes little more than a month after Standard & Poor’s stripped Brazil of its investment-grade rating, saying mounting political problems have muddled economic policy in the country.
A second downgrade to junk could have an even greater market impact than the first because many investors are prevented from holding bonds that are not rated investment grade by at least two ratings firms.
Fitch was widely expected to downgrade Brazil by at least one notch to better align its rating to those issued by competing ratings firms. On Aug. 11, Moody’s Investors Service downgraded the country to its lowest investment grade rating with a stable outlook. (Reporting by Walter Brandimarte; Editing by Chizu Nomiyama and James Dalgleish)