Brazil's debt rating has been cut by the ratings agency Standard & Poor's, increasing the economic pressure on the government in the run-up to presidential elections.

The Brazilian government has reduced room to manoeuvre amid a challenging domestic and external environment

Lisa Schineller, S&P

The ratings cut suggests to investors that lending money to the Brazilian government and the country's industry is now more risky.

This in turn pushes up the cost of taking out loans, hurting the economy.

The government in Brasilia has to pay interest on an estimated $250bn of debt, and rates are now at their highest level in three years.

On Tuesday, Brazil's currency, the real, hit a record low against the US dollar.

With the unemployment rate soaring, the economy stalling and debt levels rising, investors are additionally spooked by the prospect of a victory in October elections of the left-leaning leader of the Workers Party, Lula da Silva.

Soothing words

Presidential candidate Lula da Silva promises to continue economic reforms

Mr da Silva has tried to reassure investors, promising that he would work with the International Monetary Fund and work to keep debt under control.

However, contradictory statements from his advisers have worried foreign investors.

"Lula", as he Mr da Silva is known, is the clear front runner in the presidential contest.

But Wall Street investors hope that the governing party's candidate, Jose Serra, can pull through and continue the free market reforms begun by President Fernando Cardoso.

Negative outlook

Brazil's debt rating is now four grades below "investment grade" - the rating that is considered to be safe for risk-averse investors.

Standard & Poor's is the last of the big ratings agencies to cut back to this level, and topped its move by saying its outlook on Brazil was "negative", suggesting that further cuts could be in the offing.

Lisa Schineller, analyst with S&P, said her company believed that the Brazilian government had "reduced room to manoeuvre amid a challenging domestic and external environment".