BRAZIL-Further down in the junk pile

“Oh, we knew that was coming!”

You can’t surprise this government! The Finance Minister has two crystal balls.

Standard & Poors just pushed Brazil further down in the junk pile (to BB from BB+).

The administration said the downgrade was expected, but not just now. It was disappointed that the rating agency did not wait for the announcement of the “fiscal reform” program (which keeps getting pushed forward!)

The press today provided several “post-mortem” analyses of S&P’s decision. One reason for the downgrade was reportedly the possibility that the government would “save” Petrobrás. Give me a break! The government can’t even save “face” much less Brazil’s largest company.

Finance Minister Nelson Barbosa issued a statement that the downgrade was temporary and would be revised once the “fiscal reform” began to work its magic on the economy. (Oh, I thought there might be a problem! Silly of me!)

Ever vigilant, the PSDB chimed in with the observation of  party president, Senator Aécio Neves that the market does not trust Dilma Rousseff. Really? Who would have thought?! Might it not be a bit early to lose faith? After all it’s only been 5 years of dismal management of the economy. There is still time to recover! Or no?

Just yesterday the administration announced that it planned to revise the fiscal target for 2016 from a 0.5% “primary surplus” to a deficit of 1%-of-GDP . The downgrade will most certainly affect the cost of financing the deficit.

But, don’t be concerned. The downgrade was accompanied by the announcement that the outlook was also negative. So, this is not the worstthan can happen.

I am reminded of an old joke: In the face of severe economic problems a government announced that citizens would no longer be able to buy food and that they would have to eat manure. However, the government announced that there was also some good news: There was enough manure for everybody!

Analysis:

I reported yesterday that Brazil would soon be holding a yard sale to unload troubled assets. We can look forward to a most interesting period of M&A activity. However, the recent downgrade and possible future additional downgrades suggest that the time is probably not yet right to start buying. (There is still enough manure to go around!)

With the likely possibility of a budget deficit this year, the government is going to have to figure out how to finance it. The Finance Minister has ruled out subsidies so that would seem to mean going to the market for the money.

It would seem now that the 3.5% contraction forecast for GDP in 2016 could be closer to 5% by year-end. So hold on to your money to get some real bargains.

Ho hum!