Brazil better off than countries that lost investment grade: Moody's

By Walter Brandimarte

SAO PAULO (Reuters) - Brazil remains in better shape than countries that lost their investment-grade credit rating, a senior analyst with Moody's Investors Service said on Tuesday, suggesting the country's sharp economic downturn was not enough for a downgrade to junk.

Mauro Leos said that Moody's expects the recession in Latin America's largest economy will stretch into next year, driving up the country's debt burden to about 70 percent of gross domestic product.

After 2017, however, "there is a chance" that Brazil will stabilize with growth averaging 2 percent and a primary budget surplus near 2 percent of GDP, Leos said. That would mark "a different Brazil, hopefully a more stable Brazil even with lower growth," he added.

His remarks at a Council of the Americas event in New York came two weeks after Standard & Poor's downgraded Brazil to junk, putting investors on alert for a second, potentially more damaging move from another agency. [ID:nL1N11H1AQ]

The outlook from Leos suggested that Moody's could uphold the country's investment grade rating if President Dilma Rousseff successfully stabilizes government finances and pulls the economy out of recession next year.

"We're trying to respond (to Brazil's crisis) without overreacting," Leos said.

A second downgrade to junk could have an even greater market impact than the first one because many investors are prevented from holding securities that are not rated investment grade by at least two of the three major ratings agencies.

Moody's cut Brazil's credit rating to the brink of junk less than two months ago, with a stable rating outlook. Fitch Ratings currently rates Brazil two notches above junk with a negative outlook. [ID:nL1N10M2CO]

Achieving a primary budget surplus in 2016 will be crucial for Brazil to stabilize government finances and its credit rating, Leos said, adding that the revival of a financial transaction tax known as CPMF seems unavoidable now.

"It's hard to see that the budget numbers will add up in the absence of the CPMF," he said. "Maybe it's not the most efficient solution, but it's possibly the only solution."

Moody's is monitoring whether Rousseff will obtain enough political consensus for the austerity measures needed to close the budget gap. The beginning of a formal impeachment process against her would not be a positive development as it would increase uncertainties, Leos said.

"That is not in our scenarios," he added.

(Reporting by Walter Brandimarte; Editing by Chizu Nomiyama and David Gregorio)

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