Will Brazil Go Out of Business?

Brazil’s problems spread beyond a terrible management of the Olympics and a scandal that has badly hurt its oil company, Petróleo Brasileiro S.A. (NYSE: PBR), better known as Petrobras. It goes beyond graft accusations against president Dilma Rousseff and other high-ranked politicians. Brazil’s economy is sliding toward disaster, and it may have to ask for outside aid as a protection against sovereign default.

The level of bank defaults is already at record highs. According to Reuters:

Bank loan defaults in Brazil hit an all-time high in April as the harshest recession in at least eight decades and rising borrowing costs are making it much harder for consumer and corporate borrowers to stay current on their debt.

And then there is the huge state of Rio de Janeiro. The Wall Street Journal reported:

The state of Rio de Janeiro missed an $8.4 million payment to an international creditor as a debt crisis in Brazil’s state governments deepened amid what the federal Finance Ministry has called “out-of-control personnel expenditures.”

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Standard & Poor’s recently downgraded Brazil’s long-term currency rate to BB from BB+, which puts it even deeper into the junk category. The ratings agency also put its outlook at negative, a sign that the lowering has not ended. It was the second cut in six months.

In a recent article in the Financial Times, writers compared the Brazil problem with that in Spain after its economy collapsed in 2009. Brazil, the authors wrote, needs a similar bailout. Its oil income has been troubled. The support the Chinese have given it has slipped. The Telegraph made the same point. The sooner Brazil asks for help from the International Monetary Fund, the better.

The Olympics have distracted from Brazil’s larger problem. It is on the edge of financial collapse.

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