Ratings agency Fitch has blamed Brazil's recession for the downgrade of its sovereign debt to "speculative." A worsening political and economic outlook were cited, as President Dilma Rouseff fights an impeachment battle.
Wednesday's move by the US and London-based ratings agency follows a similar downgrade by Standard and Poor's (S&P) in September, and means Brazil's government debt has been stripped of its investment grade status. Debt deemed "non-investment grade" by ratings agencies - due to a high level of perceived risk - is more typically referred to as "junk."
Fitch's decision to cut the country's sovereign debt one notch to BB+ from BBB- previously is likely to make it more difficult - or more expensive - for ministers to borrow money to help prop up a faltering economy.
The ratings agency cited falling confidence in the economic and political landscape, in reference to an impeachment attempt against Brazilian President Dilma Rousseff.
Rousseff is fighting for her political life for alleged illegal budgeting measures to aid her re-election last year, which she says are long-accepted practices carried over from previous governments.
Although the Supreme Court struck down the impeachment proceedings last week, a secret ballot has taken place regarding Rousseff's future in Congress which, if judges rule was legitimate, could see the action restart.
Added to that, several politicians and leading businessmen have been embroiled in the largest corruption scandal in the country's history, surrounding the state-backed oil company Petrobras.
In a media release issued on Wednesday, Fitch said that increased political uncertainty "could further undermine the government's capacity to effectively implement fiscal measures to stabilize the growing debt burden."
Fitch expects the government's fiscal deficit to reach more than 10 percent of GDP in 2015 and remain high for the next two years.
The world's seventh-largest economy, Brazil is one of five so-called "BRICS" countries, along with China, India, South Africa and Russia, and has been lauded over the past decade as a major engine of global growth.
But over the past year, the country has fallen into its worst recession since the Great Depression. In the third quarter, gross domestic product (GDP) fell 4.5 percent, year on year, and many economists predict 2016 will be weaker than this year's expected 2.5 percent contraction.
Although Brazil is to host the 2016 Olympic Games, unemployment continues to soar and inflation remains high at 10.5 percent.
The Brazilian real tumbled more than two percent to 3.96 per US dollar immediately after Wednesday's news. The currency is down more than a third against the dollar this year.
mm/msh (AFP, AP, Reuters)