Run for Cover: Brazil’s credit blowout has officially begun

Image may be NSFW.
Clik here to view.Moody’s downgraded eight Brazilian banks, bringing them in line with the country’s sovereign rating. The broad problem they all share, in a nutshell, is twofold: slowing economic growth and lower interest rates, the latter driven almost exclusively by the country’s own central bank and President Rousseff. The idea behind forcing lower interest rates was nominally to make credit cheaper to Brazilian consumers, but apparently there hasn’t been enough of an increase in lending to make up for the profit margin squeeze. Not helping the situation is a spike in household debt.

Also, Eike Batista’s oil firm lost 25% in market value after the company said its first two wells would produce less than one-third of anticipated estimates.

Also, the real is swiftly heading for 2.10 against the dollar for the first time since 2009.

Thing is, the Olympics and World Cup by definition should bring in revenue eventually, right? And this should eventually be a strengthening force for the real, right? Given the shaky state of Brazil’s banking sector, I don’t see any point waiting around for that. Even my domestically focused ETFs idea seems to be in danger.

Very soon I’ll update this with some flashy charts and neat stuff like that so stay tuned. In the meantime, the official Moody’s text is here, but the FT sums up the situation rather well:

While Brazil’s banking system is considered one of the sturdiest in the world after surviving decades of internal crises, some of the country’s smaller lenders have been hit by a funding squeeze recently and rising defaults as the economy slowed.

The country’s larger banks are also facing lower returns on equity due to tighter interest rate spreads and slower credit expansion. Moody’s on Wednesday also downgraded the long-term global local currency deposit ratings or issuer ratings of 11 financial institutions, some of which are part of the same larger banking group.

“Our review indicated that there are little, if any reasons to believe that these banks would be insulated from a government debt crisis,” wrote Ceres Lisboa, analyst at Moody’s Investors Service in São Paulo.

“More particularly, we note their significant direct exposure to the Brazilian government securities, equivalent to 167 per cent of tier one capital,” she said.