Perceived Investment Risk In Brazil Is Lowest Ever; Country Has U.S. $320B in Reserves

Investors perceived risk on Brazil overall has never been so low compared to the U.S. Last week, the difference between the risk levels of the two countries reached their lowest level in history: 0.60 percentage points. Monday afternoon, it was at 0.62 percentage points.

These figures were extracted from the negotiations of widely a financial derivative traded in the market, the infamous CDS (Credit Default Swaps). This paper is a type of insurance sold to investors who want to protect themselves from a possible default.

If someone wants to buy Brazilian government bonds at the same time they can protect themselves using the CDS. Yesterday, it paid 1.1% per year in U.S. dollars for this purpose. To protect against potential problems in the U.S., the rate was 0.48% per annum. The CDS market moves trillions of dollars around the world and Brazil is one of the most traded.

What happens today is the result of three movements. "On one hand, it reflects the improvement in the perception of Brazil's solvency. It is also the result of the massive global liquidity," says Dany Rappaport,  economist and partner at Investport Consulting and Resource Management. "...specifically in relation to Brazil, there is a cyclical and a structural reason that catalyzes the structural reason".

From the point of view of Brazil, structurally, the public accounts showed a significant improvement in recent years. The relationship between the public sector net debt and gross domestic product (GDP) went from 60% in December 2002 to the current 39.9%. This means that the probability that the Brazilian government does not honor the repayment of bonds it issues is very low.


In addition, external debt was reduced dramatically in recent years due mainly to the accumulation of international reserves. Currently, the country has a safety mattress of over $ 320B. Analysts say such an amount ensures the investor an exit door when - or if - they decide to leave Brazil.

The improvement in internal and external solvency was recognized again two weeks ago, when the ratings of credit risk, Fitch raised its rating of Brazil. The country is now at an even higher step on the scale that measures the solvency of a debt issuer.

With news from O Estado de Sao Paulo.