Shares of Petrobras (NYSE: PBR), Brazil’s state-controlled oil company, are off 7% Wednesday on volume that appears likely to eclipse the daily average after Moody’s Investors Service lowered its rating on Latin America’s largest publicly traded oil producer to junk.

That is proving to be bad news for the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), an ETF that ill afford additional challenges. EWZ, the largest Brazil ETF, is lower by nearly 2% today. Two Petrobras securities combine for 6.6% of EWZ’s weight, making the company one of the ETF’s largest holdings.

A widening corruption probe, one that has ensnared Brazilian President Dilma Rousseff, has sent American depositary receipts of Petrobras lower by nearly 13% this year. Making matters worse is that it is now widely known that Rousseff had ample opportunity to stop graft at Petrobras.

“A Reuters review of a 2009 federal investigation of Petrobras, and interviews with those who conducted it, indicates Rousseff missed opportunities to stop the graft before it erupted into a crisis so big it could push Brazil’s slow-growing economy back into recession next year,” Reuters reported. Rousseff served as Petrobras chairwoman from 2003 to 2011. [Giving up on Brazil ETFs]

“Moody’s kept a negative outlook on the state-controlled oil producer’s rating after lowering it to Ba2, two levels below investment grade, on Tuesday. The downgrade marks the second reduction by Moody’s in less than a month for the company. Fitch Ratings and Standard & Poor’s rank the company at their lowest levels of investment grade,” report Filipe Pacheco and Sabrina Valle for Bloomberg.

Over the past two years, Petrobras has lost over 57% of its value, dragging EWZ to a 36.3% loss over that period. Last week, it was reported that some big-name professional investors reduced their Petrobras positions in the fourth quarter. George Soros’s Soros Fund Management LLC, BlackRock Fund Advisors and Fidelity Management Research Co. pared stakes in Petrobras during the fourth quarter, reports Rogerio Jelmayer for the Wall Street Journal.

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