When the Levy breaks

Brazil needs more than S&P downgrade to wake up

Standard & Poor's downgrade of Brazilian debt to junk might be expected to jolt the nation into mending its ways. Yet the move won't remedy President Dilma Rousseff's ineptitude, and it's unlikely to stop lawmakers from continuing to sabotage her efforts to fix the ailing $2 trillion economy.

Brazil was riding high on a commodities boom in 2008 when S&P rated its bonds investment grade. But years of state largesse and economic mismanagement, particularly during Rousseff's first term, and now lower commodity prices have left Latin America's biggest economy facing its most severe recession in decades. Inflation is near 10 per cent, unemployment is rising and the real currency hovers near 13-year lows.

Rousseff, a Leftist former guerrilla, has tried to reassure international investors by naming University of Chicago-trained economist Joaquim Levy as finance minister and imposing deeply unpopular austerity measures. Lawmakers, though, have blocked many of those measures, either on principle or to weaken Rousseff before 2018 elections. Some of them are also upset at the possibility of being prosecuted in the wide-ranging bribery scandal at state oil giant Petroleo Brasileiro, though Rousseff doesn't control the investigators.

Wall Street darling Levy, meanwhile, seems to be losing influence. Brazil's proposed 2016 budget includes a primary fiscal deficit target that he opposed. Rousseff felt compelled to support him publicly - never an encouraging sign.

If Moody's Investors Service or Fitch Ratings joins S&P in dropping Brazil's debt to junk status, pension funds and certain other foreign investors would almost certainly have to divest. That would make it even harder to turn around the economy. Moody's currently has Brazil one notch above junk, and Fitch two. It will be tough for either to maintain those ratings given fierce congressional opposition to austerity, Levy's declining influence and Rousseff's lack of sway with opponents.

It may ultimately take a new president and a new Congress after 2018 to break the deadlock. In the meantime, Brazilians - and particularly the poor - can look forward to even more economic pain.