Brazil's fiscal situation deteriorated

Concerns about the Brazilian economy and the government's failure to live up to its promises of fiscal consolidation prompted S&P to downgrade Brazil's sovereign rating to "junk" (BB+ - one notch below investment grade) in September and to keep its outlook on negative. 

Since Mrs Rousseff took office for a new mandate in January, the fiscal deficit has continued to grow, reaching an accumulated 12-month deficit of 0.9% of GDP in July. The recession, lowering tax revenues and reluctance in Congress to cut mandatory spending are giving Finance Minister Levy a tough time in getting any meaningful fiscal reforms passed. 

The government is thus unlikely to reach its recently lowered fiscal targets this year. The downgrade will add to the gloom by lifting borrowing costs and increasing the risk of other rating agencies now following suit and of another downgrade deeper below investment grade, argues Nordea Bank.