There is yet another incident happening in South America, and it just makes you wonder how long the vicious cycle of socialism versus capitalism can be played as a financial and economic shell game. Tuesday afternoon brought news that the ratings agency of Standard & Poor’s was threatening Brazil with potential “junk bond” ratings.

It may seem counterintuitive here, but S&P’s warning to Brazil could ultimately bring good news down the road. 24/7 Wall St. would like to pose this question: What if Brazil is actually forced back into ultimately living up to its economic growth potential again?

S&P did maintain the “BBB-” rating for Brazil, the lowest rung of investment grade. Where this gets complicated is that S&P changed the outlook for Brazil’s foreign-currency debt to “negative” from “stable.” That means that S&P would likely be able to downgrade Brazil in the months or quarters ahead if there are no improvements in Brazil or if things continue to get worse.

If you want things complicated further, outside of what S&P’s warning noted, Brazil’s political bias under more socialist regime that is less friendly to business and less friendly to capital makes seeing how things will improve very difficult. Many corporate conference calls around earnings from the largest US companies keep pointing to the challenges around the Brazilian economy.

This matters for the likes of Petróleo Brasileiro S.A. (NYSE: PBR), or Petrobras, and iShares MSCI Brazil Capped (NYSEMKT: EWZ), even their values did not fall on the news. Again, it could ultimately force Brazil’s politicians and voting public into a more realistic economic climate that is sustainable over time.

It was just four months ago that S&P had reaffirmed its stable outlook for Brazil. S&P noted that the country’s political and economic conditions have deteriorated quickly since then. The risks have also tilted toward the downside with a deeper economic slowdown and political resistance to use austerity to lower its debt burden.

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S&P now sees greater than a 1-in-3 chance that Brazil’s fiery politics will undermine the previous efforts to improve Brazil’s economy. The nation just seems to be unable to live within the means that President Dilma Rousseff had indicated. Rousseff’s allies and backers have been turning away from her – approval ratings for President Rousseff and her government having declined to less than 10%. Does this set the stage that perhaps Brazil’s political regime ahead might revert back to being more friendly to business.

Brazil’s debt burden is now said to be 62.5% of GDP. Is it a coincidence that the Brazilian real hit a 12-year low against the U.S. dollar? Now consider that GDP may go from flat to negative. What does that tell you about the state of the economy there? Brazil is a nation which has historically had well above average growth, but that has come to a screeching halt under Brazil’s current political and economic structure.

Elsewhere, Moody’s and Fitch Ratings both have investment grade ratings for Brazil that are two rungs above junk ratings – but their outlook is negative or cautious. Still, there may be good news here if you can find a silver lining in a bad situation — what if this acts as the straw that breaks the camel’s back?

Brazilians must know that a junk bond rating would likely drive up their borrowing costs. And Brazil cannot survive without borrowing. Maybe this will force Brazil’s politicians to start thinking about their businesses again rather than just trying to appease the masses with unrealistic financial promises that cannot be sustained through time.

iShares MSCI Brazil Capped (NYSEMKT: EWZ) ETF was last seen up 1.5% at $28.94. That compares to a 52-week range of $27.54 to $54.56. This ETF has roughly $2.4 billion in assets and has average daily trading volume of over 14 million shares.

Petrobras shares have suffered endlessly under the current political system. Whether a regime change would help this state-run oil giant remains to be seen. Still, its shares were up 3.85 at $6.84 in new York trading. Petrobras has a 52-week range of $4.90 to $20.94. Its share slide from north of $30 and $40 in years past down to under $10 goes far beyond global oil price pressure, mainly because it can be forced to operate at losses and to sell oil and gasoline under fair market prices. it also stacks its common shareholders far lower than what traditional investors are used to.

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S&P did at least keep some of its local ratings safe. Still, Brazil has to rely on that foreign debt to keep its finances going. S&P said:

At the same time, Standard & Poor’s affirmed its ‘BBB-‘ long-term foreign-currency, ‘A-3’ short-term foreign-currency, ‘BBB+’ long-term local-currency, and ‘A-2’ short-term local-currency ratings on Brazil. The transfer and convertibility assessment is unchanged at ‘BBB+’. The ‘brAAA’ national-scale rating is unchanged as well, and the outlook on this rating remains stable.

This weaker economic trajectory is, in turn, having a larger-than-anticipated impact on Brazil’s fiscal position and underpinned the lowering of the government’s official primary, or non-interest, fiscal targets last week. We do not consider the lower targets to reflect a lessened commitment toward policy correction. These lower targets, though more realistic, highlight the challenges of persistent, lower revenue amid economic contraction alongside large nondiscretionary spending. It appears that the Ministry of Finance has less ability to make up losses through cuts in discretionary spending, which  Brazil has a track record of doing when there is political resolve, given the magnitude of revenue weakness.

One last thing investors need to consider about Brazil is that its history keeps getting in the way of its future. Brazil’s political climate gets positive on business and economics from time to time, followed by periods where it cannot live up to its social promises. It is a vicious cycle, and the disparity the haves and the have-nots in Brazil makes the disparity there much worse than in the U.S. and other developed nations.

Brazil has the chance to be one of the greatest economies in the world. It just keeps getting in its own way. S&P’s full warning can be read in full.

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