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Cablegate: Second Investment Grade Credit Rating for Brazil

VZCZCXRO7497
RR RUEHRG
DE RUEHSO #0267 1511719
ZNR UUUUU ZZH
R 301719Z MAY 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8254
INFO RUEHBR/AMEMBASSY BRASILIA 9382
RUEHRG/AMCONSUL RECIFE 4116
RUEHRI/AMCONSUL RIO DE JANEIRO 8731
RUEHBU/AMEMBASSY BUENOS AIRES 3157
RUEHAC/AMEMBASSY ASUNCION 3405
RUEHMN/AMEMBASSY MONTEVIDEO 2709
RUEHSG/AMEMBASSY SANTIAGO 2405
RUEHLP/AMEMBASSY LA PAZ 3816
RUCPDOC/USDOC WASHDC 3096
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SAO PAULO 000267

SIPDIS
SENSITIVE

STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
DEPT OF TREASURY FOR JHOEK, BONEILL

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: SECOND INVESTMENT GRADE CREDIT RATING FOR BRAZIL


SENSITIVE BUT UNCLASSIFIED--PLEASE TREAT ACCORDINGLY

REF: A. Sao Paulo 0247 B. 07 Sao Paulo 0768

1. (U) On May 29, Fitch upgraded Brazil's sovereign risk rating to
investment grade, from BB+ (neutral outlook) to BBB- (neutral
outlook). According to Fitch, "the impressive improvement in
external finances, in part due to higher commodity prices, but also
the result of good policy management, along with the sovereign's net
creditor status has made Brazil much more resilient to global
financial shocks and enhanced the credibility of its macroeconomic
policy framework." The upgrade by Fitch came much more swiftly than
anticipated (only 29 days since S&P's upgrade on April 30 Ref A).
The second upgrade to investment grade by the three major ratings
agencies took significantly longer in other emerging markets; one
year in the case of Russia and two in the case of Mexico.

2. (SBU) With an investment grade credit rating from both Fitch and
S&P, Brazil's base of potential investors increases, since some
institutional investors may face restrictions in investing in
countries that have only received investment grade status with one
rating agency. Increased investment, especially from institutional
investors such as pension funds and the insurance industry will
enable a reduction in the GOB's financing costs, accelerate the
improvement of the public debt profile, and allow Brazilian bonds to
be included in indices that serve as a benchmark for large global
investment funds.

3. (SBU) The third major credit rating agency, Moody's, has been
less positive about the prospects for an early upgrade for Brazil
mainly due to fiscal policies, specifically high levels of
government spending as a percent of GDP (Ref B). The expectation
from our interactions with Moody's Director for Brazil was that the
rating agency would change its outlook from neutral to positive by
year-end, and grant Brazil investment grade in 2009. However,
Central Bank interlocutors have indicated that Moody's may in fact
be moving more quickly than anticipated in following the other
credit ratings agencies and may upgrade Brazil this year.
Regardless, Brazil has surpassed the main barrier of earning an
investment grade sovereign credit rating from two of the three main
rating agencies. Brazil is now more open to many institutional
investors and should experience significant increases in
international investment.

4. (U) This cable has been coordinated with the US Treasury
Financial Attache in Sao Paulo.

WHITE

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