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S&P says Portugal bailout credible but risks remain

Published on 11/05/2011

Standard and Poor's rating agency said Wednesday that Portugal's 78-billion-euro ($111 billion) EU-IMF bailout programme is credible but warned there are considerable implementation risks.

S&P said that the programme of measures agreed to unlock the bailout loans is consistent with its current BBB- rating for Portugal, keeping the struggling eurozone member at the bottom end of its investment grade ratings.

The programme includes detailed structural reform measures that “we view as more aggressive and front-loaded than those previously announced,” said S&P.

“In our opinion, these measures should strengthen Portugal’s medium-to-long-term economic growth and support its sovereign-debt sustainability,” it added.

Portugal reached agreement on the conditions of the bailout programme with EU and IMF negotiators last week, with the package needing to be in place by June 15 when the country must repay nearly 5.0 billion euros in maturing debt or default.

S&P said the macroeconomic estimates the programme were based on are more realistic than previous government plans, with the effort to reduce the public deficit likely to achieve results as it is mostly due to spending cuts that will not be affected by a slowdown in the economy.

“However, we believe that the programme’s implementation risks are significant,” said S&P.

Primary among them was political risk. The country will hold a general election on June 5. While both the outgoing government and the main opposition support the bailout programme, S&P said it believes a strongly-mandated majority government will be needed to carry it out.

Another worry is a possible severe credit crunch if banks cut lending to boost their capital ratios as required.

The capital needs of Portuguese banks could also turn out to be greater than estimated, it added.

“If these implementation risks are realised, we may lower Portugal’s sovereign ratings,” S&P warned, while if the programme is implemented successfully it said it the rating could stabilise at its current level.