Portugal May Be Cut by S&P on Lack of Progress in Boosting Economic Growth

Portugal may have its credit rating cut by Standard & Poor’s on concern the country may have to seek a bailout as the contagion from Europe’s sovereign debt crisis spreads through the region.

Risks to creditworthiness “stem from uncertainty about the government’s possible recourse to official funding,” said S&P late yesterday in a note. The New York-based rating company, which has an A- rating on Portugal, said it’s concerned about the European Union’s plan to introduce a permanent crisis mechanism, which could make private creditors “subordinated to public creditors.”

The report highlights concern that European leaders are not doing enough to stem a credit crisis that’s forced Greece and Ireland to seek international bailouts this year. Credit-default swaps protecting from losses on Portuguese debt jumped 4.5 basis points to 542.9 yesterday and the extra yield that investors demand to hold Spanish 10-year bonds over German bunds rose to a record on Nov. 29.

“The bailout of Ireland made it obvious that the EU had no interest in a shock-and-awe approach to this, and so will plod through the crisis dealing with one country at a time,” said Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading LLC. “The market will continue to go after each individual country until the EU steps forward with a credible way of dealing with the credit issues and questions held by the market.”

S&P said it placed Portugal’s A- long-term and A-2 short- term foreign and local currency sovereign credit ratings on “CreditWatch” with “negative implications.” S&P expects the country to stay investment grade even if it’s downgraded.

Flexibility

The lowered growth projection reflects Portugal’s inability to reduce its current-account deficit, S&P said.

“Policies the government has pursued have done little to boost labor flexibility and productivity,” the S&P report said. “As a consequence of the Portuguese economy’s structural rigidities and the volatile external conditions, we project that the economy will contract by at least 2 percent in 2011 in real terms.”

In today’s report, S&P said a further downgrade could have “a negative impact on the creditworthiness of the five Portuguese banks and two related subsidiaries” that it rates.

Italian and Spanish government bonds fell yesterday, and credit-default swaps protecting from losses on those countries’ debts rose to records.

Moody’s Cut

Portugal was lowered to A- from A+ in April by S&P. Moody’s Investors Service, which has an A1 rating for Portugal, said on Oct. 18 that the government was responding “adequately” to market pressures to lower the deficit, though the country’s long-term economic prospects are a cause for concern.

Bonds have dropped across Europe on concerns about German plans to make investors foot the bill of any future bailouts. While the plans were watered down by finance ministers last week, S&P said the so-called European Stability Mechanism could still threaten Portugal’s credit rating.

“As a result, debt that European Monetary Union member states issue might not rank pari passu with debt that the ESM issues,” said S&P. It’s concerned about the “consequences” that a bailout could have “for the position of private-sector creditors vis-a-vis official creditors after 2013.”

To contact the reporters on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net

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