Portugal and Spain in rating agency sights

21st December 2010, Comments 0 comments

Rating agencies took aim at Portugal and Spain on Tuesday, the latest in a slew of warnings that Europe faces a grim task in the year ahead if it is to contain a damaging debt and deficit crisis.

Moody's Investors Service warned it may lower by one or two notches Portugal's A1 rating owing to uncertainty about growth and borrowing prospects, although it said it expected Lisbon to be able to pay its debts.

The agency also downgraded its credit rating for two of Spain's 17 regional governments, a week after it warned it may lower the Spanish central government's rating.

Over the past several weeks ratings agencies have also slashed their ratings of Ireland and its banks, warned they may further downgrade Greece, and put Belgium on notice as well.

The Greek and Irish bailouts have focused attention on the weak state of public finance in the 16 nations which share the euro, particularly so-called peripheral countries such as Portugal and Spain.

Nervous investors have driven up the rates Portugal and Spain must pay to borrow funds to finance their debts, although pressure has eased somewhat since the European Central Bank resumed its intervention on the government debt market.

But investors are expressing concerns through rising prices of another instrument, credit default swaps, by which they insure themselves against the risk a government might not repay its debt.

And the concern is not only about peripheral eurozone countries, with the price of CDSs for French government debt hitting a record high level on Monday.

European leaders have struggled to reassure markets about the stability of the euro.

They agreed at a Brussels summit last week to establish a permanent financial bailout mechanism from mid-2013 to come to the aid of troubled eurozone governments.

But the absence of details on its size and its operation left markets disappointed and did little to assure them that EU governments have the capacity to act decisively.

Despite putting Portugal on watch for a ratings downgrade, Moody's emphasised it believed Lisbon will be able to make its debts payments and avoid a bailout.

"In Moody's opinion, Portugal's solvency is not in question," Anthony Thomas, Moody's Vice President and lead analyst for Portugal was quoted as saying in a statement.

"But the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy's ability to withstand fiscal consolidation and private sector deleveraging mean its outlook may no longer be consistent with an A1 rating," he added.

The ratings agency also downgraded two of Spain's 17 regional governments -- a major source of concern about the central government's ability to cut the overall public deficit -- a week after it warned it may lower Spain's rating.

Moody's trimmed Spain's sovereign debt rating from top-notch Aaa to Aa1 in September.

The Spanish government aims to slash its public deficit from 11.1 percent of GDP last year, the third highest in the eurozone after Greece and Ireland, to 3.0 percent -- the European Union limit -- by 2013.

In its latest report on Spain, the OECD said on Monday the country had every chance to emerge from its economic crisis, but had to enact bold reforms to achieve the growth necessary to cut unemployment stuck at 20 percent and pay down its debt.

© 2010 AFP

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