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Moody’s Looking at Portugal’s Exports in Bond-Rating Review

Jose Socrates, prime minister of Portugal
Jose Socrates, prime minister of Portugal. Photographer: Andrew Harrer/Bloomberg

Moody’s Investors Service is looking at the sustainability of Portugal’s export performance as part of a review of the country’s government-bond ratings.

“We identify the outlook for growth as one of the key considerations,” Anthony Thomas, Moody’s analyst for Portugal, said in an interview in Lisbon yesterday. “We have noted that in the last several quarters we have seen good export performance. Is that sustainable? That is one of the questions we will have to answer as part of the review process.”

Moody’s on Dec. 21 said Portugal’s bond rating may be downgraded one or two levels because of concerns that budget cuts may worsen the country’s “sluggish” economic growth. Moody’s had cut Portugal’s creditworthiness two steps to A1 on July 13. It aims to complete the ongoing review by the end of March, Thomas said.

The government of Prime Minister Jose Socrates is counting on exports such as paper and wood products to support economic expansion as it carries out the deepest spending cuts in more than three decades. The austerity moves are aimed at convincing investors that Portugal can narrow its budget gap further after the Greek debt crisis led to a surge in borrowing costs for the most-indebted euro nations last year.

No Bailout

The difference in yield between Portuguese 10-year bonds and German bunds, Europe’s benchmark, reached a euro-era record of 484 basis points on Nov. 11. The spread was at 395 basis points yesterday.

Portugal’s borrowing costs fell and demand rose at a sale of 750 million euros ($1 billion) of 12-month bills yesterday, adding to a string of auctions this week that signal Europe’s high-deficit countries can still finance their debt. Portugal’s borrowing costs also fell and demand rose at a Jan. 12 auction of 599 million euros of 10-year bonds.

Last month, Portugal said it intends to sell as much as 20 billion euros in bonds in 2011 to finance its budget and redemptions, and plans to sell a new bond through banks in the first quarter. Portugal doesn’t face any bond redemptions until April, with repayments that month and in June worth about 9.5 billion euros. Its debt agency estimates this year’s gross financing needs will be 3 billion euros lower than in 2010.

Funding Costs

“The important point to make is that we don’t rate on the basis of any one bond auction outcome,” Thomas said. “We certainly take notice of them. We notice that last week’s and indeed this morning’s ones went well. It’s really the funding costs over the medium- to long-term that count, not literally on a weekly basis.”

Socrates on Jan. 11 said austerity measures helped reduce the 2010 deficit to less than the forecast 7.3 percent of gross domestic product and that Portugal won’t need a bailout. Ireland in November became the second euro country to seek aid after Greece and the first nation to request it from the European Financial Stability Facility, the region’s rescue fund.

“What we have said is that we don’t view negatively per se a country seeking external assistance,” Thomas said. “Any judgment would depend on the conditions associated with the loan, if it happened.”

The Portuguese central bank forecasts exports will grow 5.9 percent this year and 6.1 percent in 2012, after an estimated 9 percent increase in 2010. Still, it sees the economy shrinking 1.3 percent in 2011 as consumer demand drops and the government cuts spending. The budget forecasts GDP growth of 0.2 percent in 2011, slower than last year’s estimated 1.3 percent pace.


With its economy facing a “deteriorating” outlook, Fitch Ratings on Dec. 23 cut Portugal’s creditworthiness one notch to A+, the fifth-highest level. Fitch said the outlook for that assessment is negative, meaning it is more likely to worsen than improve. Standard & Poor’s said on Nov. 30 that it may lower Portugal’s rating, having already cut it to A- from A+ in April.

Portugal’s government is trimming the wage bill by 5 percent for public-sector workers earning more than 1,500 euros a month and freezing hiring. It’s also raising value-added sales tax by 2 percentage points to 23 percent to help narrow a deficit that amounted to 9.3 percent of GDP in 2009, the region’s fourth-biggest after Ireland, Greece and Spain.

The government has set a target for a budget deficit of 4.6 percent in 2011 and aims to reach the European Union limit of 3 percent in 2012.

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