Rousseff Coup Could Cause Fitch To Junk Brazil

When it rains, it pours for Brazil. The country's economy has been negatively affected by global deflation. Now comes political turmoil. According to Bloomberg, a group of high-powered lawyers have filed a request to impeach President Dilma Rousseff:

While at least two dozen impeachment requests already have been filed, this one is different because of who is submitting it: lawyer Helio Bicudo, a prominent former member of Rousseff's Workers' Party, and former Justice Minister Miguel Reale Junior. The nation's largest opposition party supports the petition. A previous request by Bicudo and Reale had focused only on alleged budget tinkering through last year, leaving legal uncertainty over whether a sitting president could be held liable for acts during a previous term.

Accepting the petition could take weeks and would trigger a protracted legal process. Nonetheless, the process could become a big distraction for the government at the worst possible time.

The Situation

Brazil in dire staits. State-owned Petrobras (NYSE:PBR) has been embroiled in a corruption scandal that has cost the oil giant billions and has been an embarrassment to Rousseff's regime. While executives reportedly profited from bribes and kickbacks, Petrobras is laying off workers and cutting supplier contracts in order to stem cash burn.

As global deflation has set in, prices for commodities and oil - two key export items for Brazil - have plummeted. Worse, during her regime, Rousseff failed to wean Brazil off its dependence on selling commodities to China. China's economy has slowed, meaning it will probably demand less export items from Brazil. Fears of a slowing economy have caused capital flight from Brazil to safe havens like the U.S. dollar. The Brazilian real has depreciated by about 38% against the U.S. dollar over the past year.

The sinking currency will make it even more difficult for Brazil's corporations and local municipalities to repay $300 billion in dollar-denominated debt accumulated when credit was cheap. In my opinion, potential defaults on such dollar debt could be a black swan for the U.S. markets.

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