Fitch slashes Portugal rating by three notches

Fitch Ratings on Friday slashed its credit rating on Portugal by three notches to BBB-, saying it is less likely the eurozone member would receive external support during its election campaign.

“The severity of the downgrade by three notches mainly reflects Fitch’s concern that timely external support is much less likely in the near term following (Thursday’s) announcement of general elections to take place on 5 June,” said Douglas Renwick, director in Fitch’s Sovereign Ratings Group.

BBB- is the lowest investment-grade rating under Fitch’s system. It also kept Portugal on negative watch, meaning a further downgrade is possible.

“The agency views external support as necessary to bolster the credibility of Portugal’s fiscal consolidation and economic reform effort, as well as secure its financing position,” he added.

On Thursday, Portugal’s president called early general elections on June 5 after Prime Minister Jose Socrates, a socialist, resigned when parliament rejected a new austerity programme put forward by his minority government.

Finance Minister Fernando Teixeira dos Santos said Thursday that the outgoing government had no authority to negotiate a rescue deal and that he was “no longer so sure” that Lisbon could avoid asking for outside assistance.

His comments followed the release of figures that Portugal’s public deficit stood at 8.6 percent of output last year, well above the 7.3 percent government objective.

Fitch said the upward revisions of the deficit and debt figures “have further weakened Portugal’s fiscal profile and underscores the magnitude of the fiscal consolidation challenge facing the new government.”

It said the elections mean that further fiscal consolidation will likely not be implemented until the third quarter of the year, entailing a “significant risk” the target of a 4.6 percent deficit this year will not be met.

While Portugal’s government has so far insisted that the country will be able to make it by without a bailout like Greece and Ireland, Fitch said it sees external assistance as necessary for Lisbon to sustainably manage its debt.

“Fitch views an IMF/EU financial support package with strict policy conditionality as necessary to secure sustainable financing and restore medium-term debt sustainability and investor confidence in Portugal,” Renwick said.

Rates on benchmark Portuguese 10-year bonds have jumped above 8.0 percent, an unsustainable level for the long-term, especially as the country has only managed slow growth in recent years and the economy looks likely to contract this year under austerity measures.