Breaking — Fitch downgraded Portugal’s long-term default ratings from AA to AA- on Wednesday, with Outlook Negative.
Highlights from the ratings agency’s press release follow (our emphasis):
Fitch Ratings-London-24 March 2010: Fitch Ratings has downgraded Portugal’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘AA-’ from ‘AA’…
“A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,” said Douglas Renwick, Associate Director in Fitch’s Sovereign team…
The downgrade reflects significant budgetary underperformance in 2009. The general government deficit in that year was 9.3% of GDP, versus 6.5% of GDP forecast by Fitch last September…
The Negative Outlook reflects Fitch’s concern about the potential impact of the global economic crisis on Portugal’s economy and public finances over the medium term, given the country’s existing structural weaknesses and high indebtedness across all sectors of the economy. Portugal’s GDP per capita and trend growth are significantly below the ‘AA’ median, which reduces debt tolerance relative to other high-grade sovereigns.
Light at the end of the tunnel, though?:
Fitch considers the government’s recently-announced consolidation plans to be broadly credible, incorporating a high level of detail underpinning a largely expenditure-based adjustment and reasonable macroeconomic assumptions. It builds on a track record of public wage bill reduction over 2005-2008 and significant achievements in public pension reform.
However, the planned deficit adjustment is back-loaded and the risk of macroeconomic disappointment (with knock-on effects to the deficit) is significant, particularly in the latter years of the government’s projections (2012-13). Further fiscal and/or economic underperformance in 2010 and 2011 could lead to another downgrade…
Conversely, evidence that Portugal is entering a sustained recovery and that budgetary targets are being met, along with further structural reforms to enhance the productivity and competitiveness of the economy, would ease downward pressure on the rating.
And to round off:
While recent structural reforms have sought to improve productivity and international competitiveness, the sovereign credit outlook remains constrained by uncertainty over the potential growth rate of the economy. Furthermore, Portugal’s domestic and external indebtedness has greatly increased since it joined the euro area in 1999, exacerbating downside risks to medium-term growth.
Portugal’s sovereign ratings are supported by a relatively strong banking system, membership of the euro area and low historical volatility of inflation, growth and fiscal receipts, as well as a moderate debt service burden. The ratio of debt interest payments to fiscal revenue is also expected to remain below 10% into 2011. Fitch also recognises that, despite the minority position of the governing Socialist Party, there is broad political consensus on the need for structural and fiscal reform. Although it is a risk, Fitch does not expect significant government instability which could upset the passage of consolidation legislation.
The heat is on, Portugal. Fitch downgraded Greece to BBB+ in December 2009 at a key moment for Athens’ debt crisis — and was quickly followed by S&P.
More as we get it.
Related links:
Portugal v Greece on sovereign risk – FT Alphaville
Austerity, Portuguese style – FT Alphaville