Moody’s placed Portugal’s sovereign debt on review for a possible downgrade on Wednesday. The country’s ratings have been in focus since Standard & Poor’s issued a two notch downgrade of its own, to A- from A+, on April 27.
From Moody’s press release, emphasis FT Alphaville’s:
Moody’s Investors Service has today placed Portugal’s Aa2 government bond ratings on review for possible downgrade, while the government’s Prime-1 short-term rating was affirmed. Moody’s expects that, in the event of a downgrade, Portugal’s Aa2 ratings would fall by one, or at most two, notches. The review of Portugal’s ratings — which had been on negative outlook since October 2009 — is expected to conclude within a three-month time horizon.
Today’s rating action reflects the recent deterioration of Portugal’s public finances as well as the economy’s long-term growth challenges. “The review for possible downgrade will consider a repositioning of Portugal’s ratings to reflect the potentially lasting deterioration in the government’s debt metrics,” says Anthony Thomas, Vice President-Senior Analyst in Moody’s Sovereign Risk Group. “In the context of a small and slow-growing economy, such debt metrics may no longer be consistent with a Aa2 rating.”
The weakening of Portugal’s public finance position reflects the failure of successive administrations to consistently limit government budget deficits since Portugal joined the eurozone at its inception. “More recently, however, the government’s has reiterated its objective to achieve or even surpass the deficit reduction targets published in its latest Stability and Growth Programme,” says Mr. Thomas. “The well-structured debt profile means that refinancing risks are modest.”
Moody’s believes that increased risk discrimination in the financial markets may raise Portugal’s financing costs for some time to come. Nonetheless, Moody’s expects that debt service will remain very affordable in the near to medium term. Although its debt metrics may, on balance, turn out to be more consistent with a low Aa or a high A rating, the government’s debt is neither unsustainable nor unbearable.
Portugal’s growth challenges plus large fiscal deficits have led market participants to compare Portugal (and several other European countries) to Greece. Although Moody’s believes that Greece faces far more serious fiscal difficulties than Portugal, the rating agency nevertheless sees an extended period of retrenchment for Portugal as inevitable until the country’s domestic financial imbalances are corrected.
In addition to factors related to public debt sustainability, Moody’s rating review will examine other aspects of the structural adjustment agenda — in particular, the steps being taken by Portugal’s policymakers to address the poor economic competitiveness and low domestic savings, which are at the root of the country’s low trend growth rate. Moody’s forecasts assume positive, albeit relatively slow, real economic growth.
“Portugal’s growth problem is related more to its low productivity than its high costs per se,” says Mr. Thomas. “The lack of a devaluation option creates stronger — but not impossible — headwinds for the country’s economic recovery.”
Portugal’s country ceilings for bonds and bank deposits fall under the eurozone’s regional ceilings and are therefore unaffected by this rating action.
The previous rating action on Portugal was implemented on 29 October 2009, when Moody’s assigned a negative outlook to the government’s Aa2 bond ratings.
Related links:
Can Portugal cut it? – FT Alphaville
Spain and Portugal: the story so far – FT Alphaville
Portugal’s banks: reasons to be cheerful? – FT Alphaville