Brazil Claims Its Credit Worthiness is Better than the US’s. Not so fast!

Brazilian realBrazil’s minister of Finance, Guido Mantega, said this Wednesday, June 15, that the risk of Brazil defaulting on its debts is lower than the United States’. “For the first time in history, Brazil’s insolvency risk is lower than that of the United States,” said Mantega, in an interview after having breakfast with president Dilma Rousseff and governors of states in the Northeast and North, at Palácio do Planalto, the presidential palace.

Mantega referred to the assessed risk in the credit default swap market, a sort of insurance used by investors against the risk of insolvency. “Whoever is fearful that there might be a default gets the insurance (CDS),” he said.

He highlighted that this type of operation currently concentrates over US$ 70 trillion. According to data disclosed by Mantega, presently, whenever you get insurance on the Brazilian debt, you pay less than on the United States debt.

The minister also stated that he is glad about the news, because it represents the solidity of the Brazilian economy and the confidence of investors in Brazil.

“President Dilma was pleased with the fact that Brazil offers a lower risk than the US. This goes to show that we are running the correct economic policy,” he said.

The credit default swaps, CDS, which measure the cost to insure debt against default, currently stood at 41.2 basis points on the Brazilian bonds, lower than the 49.7 basis points on comparable US ones, according to Mantega.

Economists, however, cautioned that using one-year CDS as a sovereign risk barometer could mislead investors on the quality of Brazil’s credit-worthiness, because those contracts are not as widely traded as other longer-termed CDS.

In addition, they noted that the political deadlock that has prevented the U.S. government from raising its debt ceiling has led some investors to take a more cautious approach towards U.S. instruments.

Five-year CDS, probably the most widely traded CDS contract, still showed a higher risk of a Brazilian debt default, according to Markit prices. The cost of insuring Brazilian government debt trading at 111 basis points, compared with 52 basis points for the comparable U.S. CDS contract.

The United States is facing a political deadlock over the government debt ceiling. Federal Reserve chairman Ben Bernanke urged Congress to raise the debt limit before an August 2 deadline, warning of potentially devastating economic consequences.

Also on Wednesday, the Central Bank of Brazil said that the country’s economic activity registered a 3.94% rise in the first four months of 2011 compared with the same period last year.

The index, released monthly, takes into account the activity levels in the industrial, trade, agricultural and tertiary sectors. It is also used by the central bank to decide whether to make any changes in the country’s monetary policy.

ABr/MP

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