Moody's Investors Service is studying Brazil's credit rating for a possible downgrade to junk status due to a deteriorating economy, widening fiscal deficit and increasing risks of political paralysis, the ratings agency said on Wednesday.
If Moody's follows through with a downgrade in the usual three-month review period, it would be the second ratings agency to strip Brazil of its investment-grade status, following a cut by Fitch Ratings in October.
A second downgrade to junk is likely to trigger capital outflows because many foreign pension funds and other large investors are required to unload bonds once two separate agencies rate them as speculative grade.
Moody's said it had taken the decision due to "rapidly and materially deteriorating macroeconomic and fiscal trends and diminished likelihood of trend reversal in the next 2-3 years."
Economic data last week showed Brazil's economy contracted % in the third quarter from a year earlier, confirming the worst recession in 25 years as investment plunged and inflation jumped above 10% per year.
Moody's said it also based its decision on "worsening governability conditions and increased risk of policy paralysis," after Congress opened impeachment proceedings against President Dilma Rousseff, who has struggled to pass an unpopular austerity package.