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Moody's cuts Brazil rating to near junk

The headquarters of Brazilian Development Bank (BNDES) is pictured with the headquarters of oil company Petrobras reflected on its facade in downtown Rio de Janeiro, Brazil, on Aug 10, 2015.

[NEW YORK] Moody's cut Brazil's credit rating to near junk on Tuesday, reflecting growing struggles with debt and looming recession in the seventh largest economy in the world.

Moody's Investors Service said it "downgraded Brazil's government bond rating to Baa3 from Baa2." However, the agency also said in a statement that it had "changed the outlook on the rating to stable from negative." The downgrade was yet another piece of bad news for President Dilma Rousseff, who is facing opposition threats of impeachment proceedings and whose government is deeply unpopular.

According to Moody's, a weakening economy, rising government spending and "lack of political consensus on fiscal reforms" are damaging Brazil's ability to get its financial house in order.

The situation "will prevent the authorities from achieving primary surpluses high enough to arrest and reverse the rising debt trend this year and next, and challenge their ability to do so thereafter," Moody's said.

It predicted government debt will continue to deteriorate, but said that Brazil "retains a number of credit strengths that are reflected in its Baa3 rating." These include ability to withstand external financial shocks given ample international reserves, limited foreign currency debt, "and a large and diversified economy." On July 18, Standard and Poor's credit rating agency lowered Brazil to BBB-.

Last month, Brazil slashed its fiscal savings goal to 0.15 per cent of GDP from an original 1.1 per cent of GDP. Finance Minister Joaquim Levy said the reduced target reflected a drop in tax revenues.