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Rating agency DBRS rules out new Portugal bailout

Published on 25/10/2016

Portugal aims to sharply reduce its public deficit in 2017 making it unlikely to need a second international bailout in the foreseeable future, Canadian credit rating agency DBRS said Tuesday.

The country in 2011 was rescued by a 78-billion-euro bailout from the European Union and the International Monetary Fund, a process that involved steep spending cuts and painful reforms.

It exited the bailout in 2014 without the need for further financing, but its economic growth is still weak and a left-wing government which took office last year has reversed some austerity measures, raising market concerns over the country’s finances.

Asked if a new bailout for Portugal is likely in the near or distant future, DBRS co-head of sovereign ratings Nichola James told AFP: “No, the fiscal flow metrics are improving.”

She pointed out that the government envisages a 0.6 percentage point reduction in the structural deficit — which excludes the effects of the business cycle and one-off items — next year as required by the European Union.

DBRS on Friday maintained its rating of Portuguese debt at investment grade level, a move which means the nation’s debt can still be purchased by the European Central Bank’s bond-buying programme.

It is the only one of the four agencies accepted by the bank that has not downgraded Portugal’s debt rating to junk bond status.

But DBRS warned that the rating could be downgraded if there is “a deterioration in public debt dynamics, resulting from markedly lower growth or a prolonged period of elevated interest rates.”

James told Portuguese newspaper Observador on Friday that she was “comfortable with interest rates of up to 3.5 percent or 4.0 percent” for Portugal.

But when asked by AFP if DBRS would lower Portugal’s rating if interest rates rose above this level, she said this was “not a benchmark”.

“It depends on what other factors are at play,” she added.

Portugal’s 10-year bond yields hit 3.564 percent at the beginning of October, way above neighbouring Spain’s and Italy’s, but have fallen to 3.152 percent after DBRS kept its rating for the country unchanged.

The government’s draft budget for 2017 forecasts the public deficit will fall to 1.6 percent of economic output next year from 2.4 percent in 2016, well below an EU limit of 3.0 percent.

Portugal posted a deficit of 4.4 percent of gross domestic product in 2015, the third highest in the EU after Greece and Spain.