Moody's slashes Portugal rating by four notches

6th July 2011, Comments 0 comments

Moody's Investors Service on Tuesday slashed its credit rating on indebted eurozone struggler Portugal, bailed out earlier this year, by four notches to Ba2 from Baa1, warning it could be lowered further.

Moody's said the downgrade reflects "the growing risk that Portugal will require a second round of official financing before it can return to the private market (to raise financing)."

The action, it said, was also based on increased concerns Lisbon would not meet deficit reduction and debt stabilisation targets agreed with the European Union and International Monetary Fund (IMF) due to the "formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system."

In April, Moody's cut Portugal by one notch from A3 to Baa1 as it expected Lisbon to have to seek outside help to resolve its debt problems, which it duly did, securing 78 billion euros ($112 billion) from the EU and IMF after Greece and Ireland were rescued in 2010.

The ratings agency said Tuesday its main concern was that Lisbon would require a second bailout, just as Greece now does, and that private sector creditor banks would have to take some of the pain.

Moody's noted in a statement "that European policymakers have grown increasingly concerned about the shifting of Greek debt held by private investors onto the balance sheets of the official sector.

"Should a Greek (debt) restructuring become necessary at some future date, a shift from private to public financing would imply that an increasingly large share of the cost would need to be borne by public sector creditors.

"To offset this risk, some policymakers have proposed that private sector participation should be a precondition for additional rounds of official lending to Greece."

Although current plans, promoted by France, for a second Greek bailout are based on a debt rollover and thereby leave the amount unchanged, in practice investors are expected to lose out because they will have to wait longer to get their money back.

If that turns out to be the case for Portugal as well, it could be negative on several counts, Moody's said.

"This development is significant not only because it increases the economic risks facing current investors but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms."

Moody's added another worry was that Portugal would not be able to cut its public deficit to the EU limit of 3.0 percent of Gross Domestic Product by 2013 from 9.1 percent last year as set out in the EU-IMF programme.

The agency said it may be difficult to cut spending in sectors such as healthcare, state-owned enterprises and regional and local governments while increasing tax revenue will be a real challenge.

At the same time, "economic growth may turn out to be weaker than expected, which would compromise the government's deficit reduction targets," it said, with reduced spending adding to the downward impetus.

On the positive side, Moody's said its concerns about the country's political stability have eased after the ruling Socialists were ousted in June 5 general elections and replaced by the centre-right government of Prime Minister Pedro Passos Coelho.

The Portuguese finance ministry issued a statement in response to Moody's decision which it said reveals "vulnerabilities" in the economy but does not take certain factors into account.

"The downgrade reveals the adverse context of the sovereign debt crisis and the vulnerabilities of the Portuguese economy," the finance ministry statement said.

It added that the new government last week presented an austerity programme said to be "more ambitious" than the international aid plan, with measures including the creation of a special revenue tax.

"Moody's decision does not take into account the effects of the special tax on revenue," said the ministry, a measure "that proves the government's determination to meet this year's deficit targets."

The downgrade "does not take account of the broad political consensus in support of rolling out the measures negotiated with the troika (the IMF, the EU and the European Central Bank)," the statement added.

© 2011 AFP

0 Comments To This Article