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Brazil's credit rating sits barely above the junk-bond line after a downgrade by Standard & Poor's, underscoring the country's dramatic fall from the heights of emerging-market superstardom just a few short years ago.

The ratings agency said it was responding partly to the "subdued outlook" for economic growth over the next two years, as well as what it calls "fiscal slippage" and the government's "constrained ability to adjust policy" in advance of a tough presidential election this fall. Which, in plainer English, means no spending cuts or tax increases can be expected from a harried government hanging on to power by its fingernails.

Brazil now sits with a rating on senior government debt of triple-B-minus, the bottom rung on the investment-grade bond ladder. That's a level many institutional investors won't touch, because the next step down is junk, which would compel high-grade bond funds to dispose of their holdings.

The lower rating will drive up financing costs for Brazilian state and corporate borrowers. It will also ratchet up pressure on President Dilma Rousseff, whose efforts to shore up an economy that has been in a downward spiral since 2011 have done little for the economy. In fact, they've only succeeded in driving up inflation and worsening the country's fragile fiscal health.

She's already dealing with other political headaches, ranging from serious delays in constructing venues for the 2016 Olympics to a brewing scandal over her possible role in the purchase of a U.S. refinery by state oil company Petrobas in 2006.

To make a convoluted, court-involved story short, Petrobras ultimately forked out $1.18-billion (U.S.) to its Belgian partner, Astra Oil, for the Texas refinery. Which was a nifty deal for Astra, considering it had paid only $42.5-million for the property in 2005. Ms. Rouseff was Petrobras's chair at the time and gave the deal the green light. Her defence is that she was given a "technically and legally flawed summary" of the purchase document.

The obvious question, seized on by her political opponents, is that if she could be so easily hoodwinked when she was in charge of a corporate board, what must officials be getting past her now?

S&P isn't raising any red flags over shady dealings by state companies, although voters certainly ought to when confronted with a governing party that believes fervently in state control of key assets. But the agency is certainly singling out the government's faltering fiscal credibility, noting the troubling habit of exempting certain spending and revenue items from its fiscal target and turning to state-owned banks financed by "below the line" (read: off the books) funding from the Treasury.

The rating change puts Brazil a notch below Russia, at the bottom of the once-lionized BRICs. S&P downgraded its outlook for Russia last week, signalling that the race to see who can go over the investment-grade cliff first isn't over yet.

In the meantime, markets are casting their eyes ahead to the election in October, which may be the beleaguered country's best chance to turn its fortunes around. The ratings cut had no effect on Brazilian equities or the currency, the real; though both have taken a severe pounding over some of the same economic and fiscal concerns raised by S&P, investors are clinging to the notion that conditions are unlikely to get much worse before Brazilians go to the polls.

That seems to be the government's view, too. The finance ministry called the rating cut "inconsistent with the solidity and the fundamentals of Brazil." It's a brave front that's not backed up by the facts. Unless voters send a strong message to the country's leaders, Brazil's fiscal and economic management will continue to earn the failing grades it deserves.

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