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Brazil downgrade leaves little choice but austerity for Rousseff

BRAZILBRASILIA-- One thing is clear for Brazil's economy after its credit rating was downgraded to junk: political leaders now have little choice but to push ahead with painful austerity measures if they hope to regain market confidence.
  Faced with a growing budget deficit and the worst recession in nearly three decades, senior officials said on Thursday they will double down on austerity to lift revenues, cut spending and balance public finances that went off kilter with a raft of stimulus measures in recent years.
  Finance Minister Joaquim Levy, the face of austerity in President Dilma Rousseff's cabinet, said measures will be taken this month to bridge a shortfall currently projected in next year's budget.
  He did not specify what they might be but said the downgrade will prod policymakers into action.
  "The government is determined to meet the primary budget surplus target of 0.7 percent of GDP in 2016," he told reporters after an emergency cabinet meeting.
  Standard & Poor's on Wednesday stripped Brazil of its hard-won investment grade rating, moving sooner than the government and investors had expected.
  "This is a wake up call for Brazil, for Congress and for the government," said Senator Eunicio Oliveira, leader of the PMDB party, Rousseff's main coalition ally. "There is no alternative but to cut spending and feel the pain."
  Rousseff, a leftist who long defended her stimulus efforts and has failed this year to define a clear path toward economic recovery, quickly changed her tone.
  In an interview published Thursday in Valor Economico, a financial newspaper, the beleaguered president, who recently proposed a 2016 budget with a deficit, said she is now committed to achieving a primary surplus next year.
  In addition to cost-cutting, the government will pursue tax hikes to raise revenues, she said. "Unequivocally, we have to expand revenues."
  Although investors expected a downgrade at some point, they still sold off Brazilian assets early on Thursday. Stocks suffered modest losses while the currency, the real, fell nearly 3 percent to a 13-year low of 3.9 per dollar.
  Levy, a banker who has faced tough resistance as he tries to steer through more market-friendly policies, said the government will send a new round of cost-cutting proposals to Congress, which so far this year has largely bucked austerity and in some cases increased spending.
  Levy said the measures would help the country, winded by the collapse of a global commodities boom that fueled an export bonanza for Brazil, adjust to lower growth and demand in China.
  "This is not a country on the edge of crisis. It's a country that is adjusting itself for a very different global environment," he said in a television interview. "The sooner we adjust, the less costly that transition will be."
  To succeed, Rousseff will have to win cooperation from her unruly allies in Congress, not to mention opposition lawmakers, many of whom support calls for the president to step down or be impeached.
  "The president has no credibility in Congress and many here doubt her ability to continue governing," said Danilo Forte, another PMDB lawmaker. "Raising taxes will be politically very difficult."
  The government must also overcome its own divisions.
  Levy has crossed swords with Nelson Barbosa, the influential planning minister and a longtime proponent of state-led development policies, over the extent of austerity proposals.
  That has led investors to perceive the government's efforts to impose more fiscal discipline as half-hearted.
  In announcing the downgrade, S&P questioned the government's "ability and willingness" to deliver sound economic policy. On Thursday, the agency said it expects Rousseff to face political difficulties in trying to cut deficits.
  Stalwarts within the ruling Workers' Party, along with some business groups keen for more of the easy credit and tax breaks that Rousseff first used to counter the economic downturn, are still urging the government for more stimulus.
  Former President Luiz Inacio Lula da Silva, Rousseff's mentor and predecessor, on Thursday downplayed the impact of the downgrade, a defiant posture that differs with the triumphant stance he took when Brazil won its long-sought investment grade status in 2008.
  The downgrade "doesn't mean anything," he said during a speech in Argentina. "It just means that we can't do what they want us to do. We have to do what we want to do."
  But economists say the government has little incentive to ignore investors if it wants to avoid further downgrades by other rating agencies, a move that would make borrowing even more costly and further undermine market confidence.
  A rebound "will depend on the country's ability to set up some kind of war cabinet to deliver the measures," said Octavio de Barros, chief economist at Bradesco, Brazil's second-largest private sector bank.

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