Brazil Said to Keep Its Foreign Reserves in Dollars After U.S. Downgrade

Brazil, the fourth-largest holder of U.S. Treasuries, has no plan to change its foreign currency reserves holding as a result of Standard & Poor’s downgrade of the U.S.’s credit rating, a government official said.

Brazil is not required to sell any of its U.S. debt holdings because of the downgrade, said the official, who declined to be named because he is not authorized to discuss the country’s reserves policy publicly. Latin America’s biggest economy will keep in place the same strategy it started in 2008, amid the collapse of the Lehman Brothers Holdings Inc., of gradually diversifying its foreign reverses by shifting away from U.S. dollars, he said.

The central bank reduced its holdings in dollars to 81.9 percent of total reserves in 2009 from 90 percent in 2007, according to its latest report.

While volatility is likely to increase in the coming days, Brazil’s government doesn’t expect investors to dump U.S. Treasuries because they remain among the world’s safest and most-liquid assets, the person said.

President Dilma Rousseff’s administration is watching the situation closely and stands ready to take steps to protect Brazil’s economy from a global crisis if needed, the official said.

Brazil’s foreign currency reserves have jumped 35 percent in the past year, to a near-record $348 billion as of Aug. 4. About $211 billion is held in U.S. Treasuries, making it the U.S. government’s fourth-biggest creditor after China, Japan and the U.K.
Downgrade

The U.S. had its AAA credit rating downgraded for the first time by S&P on Aug. 5, which slammed the nation’s political process and said lawmakers failed to cut spending enough to reduce record deficits.

S&P dropped the ranking one level to AA+, after warning on July 14 that it would reduce the rating in the absence of a “credible” plan to lower deficits even if the nation’s $14.3 trillion debt limit was lifted.

S&P’s downgrade went further than Moody’s Investors Service and Fitch Ratings, which affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended the debt-ceiling impasse that pushed the country to the edge of default.

S&P currently gives 18 sovereign entities its top ranking, including Australia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt-to-gross domestic product this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade.