S&P puts Portugal on watch for rating downgrade

Standard & Poor’s on Wednesday put Portugal’s BB long-term credit rating on watch for a possible downgrade over increased risks the eurozone nation will fail to meet the fiscal targets under its international bailout.

“Potential shortfalls in meeting programme targets, in our view, could increase uncertainty about the trajectory of government debt and increase the likelihood of Portugal requiring a second support programme,” it said in a statement.

S&P’s rating action comes as auditors from the International Monetary Fund, the European Commission and the European Central Bank are currently in Lisbon to review Portugal’s progress under its 78-billion-euro bailout and whether to release a 5.5-billion-euro loan instalment.

Portuguese government officials have called for easing the country’s 2014 public deficit reduction target from 4.0 percent to 4.5 percent of GDP, which the troika of lenders have already indicated they will turn down.

S&P also pointed to risks that Portugal’s top court could overturn additional fiscal and reform measures, weaker-than-expected growth and a resurgence of political tensions also leading the country to fail to meet its fiscal consolidation targets.

Portugal’s Constitutional Court invalidated in April one set of government measures and in August blocked a reform that would have allowed cuts in public sector jobs.

“In our opinion, these Court decisions raise doubts as to whether Portugal will be able to comply with the ambitious debt stabilisation target set out in its current IMF-EU programme,” said S&P.

It also noted that the near collapse of the centre-right government in July was “symptomatic of weakening political backing for further fiscal and structural reforms.”

The ratings agency said “we see an increasing risk that Portugal will not regain full capital market access early next year and that the Portuguese government will require a second official support programme after the current programme expires in June 2014.”

Portugal’s long-term borrowing costs have risen to levels near which it was forced to seek international aid two years ago, adding to concerns whether it will be able to borrow affordably on the market by next year.

The yield on Portuguese government 10-year bonds stood at 7.18 percent in secondary trading on Wednesday.

A Portuguese government official signalled earlier this week the country wants to negotiate a precautionary lending programme when the current bailout expires.

S&P said Portugal’s creditworthiness appears to “increasingly depend on the support and flexibility of its official creditors.”

It said there was a one-in-two chance it would lower Portugal’s rating if fiscal performance falls short, reform plans falter or support from its official creditors waivers.