Portuguese Government-Bond Ratings Cut to A1 at Moody's; Outlook Is Stable
Head of global economics at Fitch Ratings Ltd. Brian Coulton, said a downgrade of Portugal is 'not totally obvious.' Photographer: Chris Ratcliffe/Bloomberg
July 13 (Bloomberg) -- Brian Coulton, head of European sovereign ratings at Fitch Ratings Ltd., talks about Portugal's credit rating cut by rival agency Moody’s Investors Service. Coulton, speaking in London, also discusses the stress tests on European banks. He talks with Andrea Catherwood on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Portugal had its credit rating cut two levels to A1 at Moody’s Investors Service on prospects for weak economic growth and a growing debt burden after the government allowed its budget deficit to balloon.
“The Portuguese government’s financial strength will continue to weaken over the medium term,” Moody’s said in a statement today, adding that the outlook is stable. “The Portuguese economy’s growth prospects are likely to remain relatively weak unless recent structural reforms bear fruit over the medium-to-longer term.”
Portuguese bonds extended declines after the rating cuts, with the yield on the benchmark 10-year bond rising 7 basis points to 5.50 percent. That widened the yield premium investors demand to buy the Portuguese bond over comparable German debt by 4 basis points to 284 basis points. The euro slipped to $1.253 at 9:20 a.m. in London from $1.260 yesterday.
The Portuguese government has raised taxes and cut spending in an attempt to rein in the euro region’s fourth-largest budget deficit, threatening to crimp growth in an economy that has barely expanded in a decade. High-deficit nations such as Portugal and Spain are adopting austerity measures after Greece’s near-default led their borrowing costs to surge and prompted the European Union to adopt a 750 billion-euro ($941 billion) financial backstop.
Watching Spain
“With the announcement on Portugal, I would say be on the lookout for a downgrade on Spain,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc in London. “My bias would be toward two notches.”
Portugal had a budget gap of 9.3 percent of gross domestic product last year, more than three times the EU’s 3 percent limit. Ireland’s shortfall was the largest in the euro region at 14.3 percent of GDP, followed by Greece at 13.6 percent and Spain at 11.2 percent.
The extra yield investors demand to hold Portuguese debt rather than German equivalents surged to a more than decade high of 349 basis points in May before the EU created the financial backstop for nations struggling to raise funds.
Moody’s signaled on May 5 that it was considering cutting Portugal’s rating for the first time over the deterioration in its public finances. Portugal had held the third-highest Moody’s investment grade since 1998. Moody’s isn’t planning further action and is “very confident” Portugal will trim its deficit to 3 percent of GDP by 2013, Anthony Thomas, lead analyst at Moody’s for Portugal, said today in a telephone interview.
Stable Outlook
Moody’s said its outlook on Portugal is now stable, a sign that the ratings company has confidence in the government’s deficit-cutting efforts, the country’s Finance Ministry said in a statement today.
Even if Portugal makes good on that pledge, its debt burden as a proportion of GDP will probably continue to grow over the next two to three years, reaching almost 90 percent of output, Moody’s said. Euro region nations pledged to keep the debt within 60 percent of GDP to qualify for the single currency.
The country’s ratio of debt to GDP will start declining in 2013 to 84.8 percent from 85.9 percent in 2012 and 2011, the Finance Ministry said on July 2. The ministry on that day also said it aims to narrow its budget deficit faster than forecast previously and meet the 3 percent limit in 2012, a year earlier than in a previous plan. It kept its deficit targets for this year and 2011 at 7.3 percent and 4.6 percent, respectively.
Deficit Cuts
The Portuguese government has said it’s cutting the wages of top government officials, delaying some investments on railway projects and temporarily raising value-added, personal- income and corporate taxes in a bid to narrow the budget gap. The Socialist government’s deficit-cutting moves are supported by the Social Democrats, the biggest opposition party in the Portuguese parliament.
Finance Minister Fernando Teixeira dos Santos on May 18 said the government was maintaining its economic-growth forecast of 0.7 percent for this year even after announcing more budget- cutting measures that may curb domestic spending. Portugal’s GDP rose 1.1 percent in the first quarter from the previous three months, the fastest pace in almost five years.
The Finance Ministry on July 2 said it estimates economic growth will slow to 0.5 percent in 2011, and will then accelerate to 1.1 percent in 2012 and 1.7 percent in 2013.
Growth Constraints
Fiscal consolidation and bank de-leveraging could depress Portugal’s growth in the short term, Thomas said. Standard & Poor’s rates Portugal A-, since its last downgrade on April 27, while Fitch Ratings has an AA- grade on the country’s debt.
Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, today said Portugal is undertaking “huge” structural and fiscal changes after Moody’s downgraded the country’s credit rating.
“I don’t really understand why at the very moment of these tough decisions by the Portuguese government that this downgrade is occurring,” Juncker said in an interview in Brussels.
Brian Coulton, head of global economics at Fitch Ratings Ltd., said a downgrade of Portugal is “not totally obvious.” He spoke in a Bloomberg Television interview today.
To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Joao Lima in Lisbon at jlima1@bloomberg.net.
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