GLOBAL ECONOMY

Brazil financial markets fall after credit agency downgrades debt to 'junk' status

Visitors look at stock price monitors inside the BM&F BOVESPA stock exchange headquarters in Sao Paulo, Brazil, Thursday, Sept. 10, 2015. Brazil's financial markets fell Thursday in the aftermath of credit agency Standard & Poor's downgrading the country's sovereign debt to junk status. (AP Photo/Andre Penner)

Visitors look at stock price monitors inside the BM&F BOVESPA stock exchange headquarters in Sao Paulo, Brazil, Thursday, Sept. 10, 2015. Brazil's financial markets fell Thursday in the aftermath of credit agency Standard & Poor's downgrading the country's sovereign debt to junk status. (AP Photo/Andre Penner)

Brazil's financial markets fell on Thursday in the aftermath of credit agency Standard & Poor's downgrading the country's sovereign debt to "junk" status.

By the end of the day, the Brazilian real fell 1.34 percent to 3.85 per U.S. dollar. It would have dropped even further if the Central Bank hadn't intervened by selling some $1.5 billion on the spot market.

The benchmark Bovespa stock index dropped down 0.33 percent.

President Dilma Rousseff met in the morning with members of her Cabinet and congressional leaders to discuss the downgrade and said it wasn't a catastrophic event.

Citing presidential advisers, the Folha d S. Paulo newspaper said Rousseff urged them to cut public spending.

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Finance Minister Joaquim Levy said at a news conference that Brazil must reduce expenditures and increase taxes "to bring about more security and tranquility to the economy."

He said the government is aiming for a primary surplus of 0.7 percent of gross domestic product in 2016.

"This is the minimum necessary to service our public debt," he said.

Levy, a pro-market minister disliked by the left-wing base of Rousseff's Workers' Party, has repeatedly called for stronger austerity measures, cuts in spending and for the government finding new revenues, via taxes or other means.

University of Sao Paulo economics professor Rafael Paschoare told the G1 news portal that the downgrade shows that credit rating agencies "no longer believe the government when it says things well get better."

For Roberto Luis Troster, also of the University of Sao Paulo, the downgrade "represents the loss of Brazil's credibility."

"Either the country responds rapidly making the necessary fiscal adjustments or our growth expectations will keep dropping."

The downgrade comes on the heels of Rousseff submitting a budget to Congress that already had a built-in deficit of about $10 billion, meaning she tossed to legislators the burden of figuring out where to make cuts.

The downgrade, while widely expected, came earlier than many analysts forecast and arrives at a time of extreme volatility for the Brazilian economy, with inflation hovering around 10 percent and unemployment the highest it has been in decades.

Ana Galvao, an Associate Professor of Economic Modelling and Forecasting at Britain's Warwick Business School said in an emailed statement: "The Brazilian economy is now paying the price for the unorthodox growth-enhancing monetary and fiscal policy from 2010 to 2014 that, together with political instability caused by corruption scandals, are the main causes of the current crisis and the downgrade of the Brazilian Government debt to 'junk'."

The U.S.-based Eurasia Group political and economic risk consulting firm said in a Thursday note that the because of the downgrade Levy's standing has become more precarious.

"S&P explicitly cited the wavering commitment within government to the fiscal adjustment (and indirectly Levy) as a reason for the downgrade. Further, the finance minister's leverage partially stemmed from the view that he was uniquely capable of avoiding a downgrade."

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