The long-term rating was lowered one level to BB+ from BBB- with a negative outlook, Fitch said today in an e-mailed statement. Portuguese 10-year bonds fell after the announcement, with the yield at 12.14 percent at 1:09 p.m. in Lisbon.
“The country’s large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign’s credit profile is no longer consistent with an investment-grade rating,” Fitch said. The ratings of utility EDP-Energias de Portugal SA (EDP) and telecommunications company Portugal Telecom SGPS SA (PTC) are unaffected, Fitch said.
Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro ($104 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout and now aims to return to bond markets in 2013.
Barclays Capital said it will cut Portugal’s government bonds from its Euro Treasury Index at the end of the month after the Fitch announcement. The move makes the bonds “ineligible” for inclusion in the index, Huw Worthington, a fixed-income strategist in London, said today by phone.
Citigroup Inc. said it will keep Portugal’s bonds in its indexes after the downgrade. The company’s European Government Bonds and World Government Bonds indexes use rankings from Standard & Poor’s and Moody’s Investors Service, said Nishay Patel, a fixed-income strategist at Citigroup in London.
“A one-notch downgrade from S&P will take Portugal out of the index,” Patel said.
S&P cut the country’s rating twice in March to BBB-, one level above junk status, and has a negative outlook. Portugal’s rating was cut to below investment grade in July by Moody’s. The long-term government bond ratings were lowered to Ba2 from Baa1.
The government aims to trim the budget deficit from 9.8 percent of gross domestic product in 2010 to 5.9 percent in 2011, 4.5 percent in 2012, and to the EU ceiling of 3 percent in 2013. Debt will reach 100.8 percent of GDP this year and peak at 106.8 percent in 2013 before starting to decline, the government forecast. Debt was 93.3 percent of GDP in 2010.
Fitch said its “base case” is that government debt will increase to around 110 percent of GDP at the end of 2011 and peak at around 116 percent at the end of 2013. The rating company said it expects Portugal will meet its deficit targets for this year and next year.
“The 2012 budget contains significant expenditure reductions, mainly on pensions and civil-service pay,” it said in the statement. “The budget is well-designed and is based on reasonable GDP assumptions. Successful economic and fiscal rebalancing under the IMF-EU program would ease downward pressure on the rating.”
Portuguese Finance Minister Vitor Gaspar on Nov. 16 said the second quarterly review of the country’s financial-aid program was “successful,” allowing it to receive another rescue payment tranche of 8 billion euros. The so-called troika of the European Commission, ECB and IMF said that Portugal’s plan is “off to a good start,” adding that the 2012 budget includes “bold and welcome measures.”
The 2012 budget includes a plan to eliminate the summer and Christmas salary payments for state workers earning more than 1,000 euros a month. Tax deductions will be reduced and the government plans to increase the value-added tax rate on some goods. Spending cuts in 2012 represent 4.4 percent of GDP, including reductions on health-care spending, while revenue increases represent 1.7 percent of GDP.
The economy will shrink 3 percent next year, the only euro- area economy to do so besides Greece, which is set to contract 2.8 percent, the commission forecast on Nov. 10. The euro area is forecast to expand 0.5 percent in 2012, it said. Portugal will return to growth in 2013, the commission said.
“Over the next two years, the recession makes the government’s deficit-reduction plan much more challenging and will negatively impact bank asset quality,” Fitch said. “However, Fitch judges the government’s commitment to the program to be strong.”
The EU said today it’s in the best position to assess the economic situation in Portugal. “We have more information, more updated data from the Portuguese authorities,” Olivier Bailly, a spokesman for the commission, told reporters in Brussels when asked about Fitch’s downgrade.
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