Moody's slashes Portugal rating by four notches

5th July 2011, Comments 0 comments

Moody's Investors Service on Tuesday slashed its credit rating on Portugal, bailed out earlier this year, by four notches to Ba2 from Baa1, warning they 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 was also based on increased "concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union and International Monetary Fund 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 downgraded 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."

© 2011 AFP

0 Comments To This Article