By Asher Levine
SAO PAULO (Reuters) - Brazil's financial markets fell on Thursday after Standard & Poor's cut the country's sovereign rating to junk late Wednesday, though assets began to pare losses in late morning trading as the downgrade had been largely priced in.
The drop from investment grade, which came sooner than many in the market had expected, reflected President Dilma Rousseff's struggle to regain investor confidence as political turmoil drives a growing government deficit in Latin America's largest economy.
Brazil's currency, the real, fell nearly 3 percent to 3.9 per U.S. dollar, a 13-year low, before backing off to 3.88 per dollar, still 2 percent down on the day, after the central bank intervened.
The central bank said it will sell as much as $1.5 billion on the spot market through repurchase agreements on Thursday, a measure that helps to support the real.
The bank carried out a similar operation on Tuesday.
The currency has fallen 31 percent against the dollar this year as investors doubt the government's ability to shore up its finances and pull the economy out of its worst recession in twenty five years.
"Everyone knew the downgrade was coming but the fact that it came so quickly scared some people," said Andre Perfeito, chief economist with Gradual Investimentos in Sao Paulo.
He added: "People are looking to Brasilia for some kind of plan but for now there is nothing to calm the market."
Rousseff said in an interview published Thursday that Brazil "is paying all its contracts and we have a clear economic strategy."
The country will achieve a primary budget surplus next year, Rousseff said, despite having sent Congress a budget bill that forecasts a primary deficit in 2016.
Brazilian stocks saw modest losses, with the benchmark Bovespa stock index down about 1.3 percent.
Companies whose earnings are primarily in dollars, such as mining firm Vale SA and pulp producer Fibria Celulose SA both lent support to the index, helping offset a 4.5 percent drop for state-run oil producer Petroleo Brasileiro SA, known as Petrobras.
Petrobras and other heavily indebted companies such as airline Gol Linhas Aereas SA led losses on the Bovespa due to concerns about higher borrowing costs after the credit downgrade.
Brazil's interest-rate futures jumped in opening trade. Yields paid on interest-rate contracts expiring in January 2023 rose 52 basis points to an all-time high of 14.76 percent.
(Additional reporting by Walter Brandimarte and Brad Haynes; Editing by Jeffrey Benkoe and W Simon)
