SAO PAULO – Fitch Ratings cut Brazil's credit to junk status Wednesday, the second of the big three agencies to rip away the nation's hard-won investment grade status and igniting fears that the recession enveloping Latin America's biggest economy will last longer than expected.
The decision was largely anticipated by markets, but will curtail investment in Brazil further as many global funds require that at least two agencies deem a nation investment worthy to keep their cash in that country.
Standard & Poor's cut Brazil's debt to junk status in August, meaning only Moody's has kept the globe's seventh-largest economy at investment grade.
The economic turmoil is fueling political chaos that could lead to the impeachment of unpopular President Dilma Rousseff. Both the political and economic woes have been deeply influenced by an ever-growing kickback scandal at state-run oil giant Petrobras, which has seen dozens of key politicians and CEOs of top construction, engineering firms and even Latin America's biggest investment bank facing charges or already thrown in jail.
In a statement, Fitch said its decision reflects Brazil's "deeper recession than previously anticipated, continued adverse fiscal developments and the increased political uncertainty that could further undermine the government's capacity to implement fiscal measures to stabilize the growing debt burden."
Fitch's move comes a day after Rousseff sent to Congress a proposal to reduce a key fiscal target for next year — a blow to those arguing that the nation needs strong austerity measures to pull itself out of recession.
But a rebellion among governing coalition lawmakers in the lower house has blocked Rousseff from passing many of the fiscal reforms pushed by her Finance Minister Joaquim Levy, an orthodox, U.S.-trained economist who was brought on to bolster the business class' confidence in the leader, after many criticized her first term in office as being full of heavy-handed intrusion into the economy.
Fitch's downgrade and the revision of the fiscal target could lead to Levy's exit.
Levy told journalists in Brasilia on Wednesday that he felt "obfuscated" by Rousseff's decision, labelled Fitch's downgrade as "serious" and did not respond to questions about whether he was staying on the job.
In a statement published after Fitch's decision, Brazil's Finance Ministry said the country has the means to reverse the current downturn.
"Despite the short term indicators and the current uncertainty, the Brazilian economy has positive and solid foundations," the statement said.
Brazil's Central Bank expects the country's economy to shrink at least 3 percent in 2015, but Fitch forecasts it could dip 3.7 percent. For 2016, Fitch expects Brazil's GDP to contract 2.5 percent.
Fitch gave Brazil an investment-grade rating in early 2008, when the nation was a darling among the emerging market world, but last October signaled that it was considering a downgrade to junk.
Economist Guilherme Deletze, an adviser for Sao Paulo's Chamber of Commerce, said that Fitch's decision "was expected, but it will worsen every scenario for 2016."
"The currency will devalue, the interest rates will go up, and that will make loans more expensive which ultimately will stall the whole economy even more," he told Globo TV.
Members of Brazil's opposition are counting on the economic scenario getting even worse to bolster their bid to remove Rousseff, with all sides acknowledging that it'll likely take mass protests in the street to give those against her the political capital to push impeachment through Congress.
On Sunday, about 40,000 people took to the streets of Sao Paulo, according to a Datafolha institute poll — a much weaker showing than previous anti-Rousseff rallies.