Portugal’s Outlook Raised to Stable by S&P on EU Support

Portugal’s credit rating outlook was raised to stable from negative by Standard & Poor’s, which said European lenders will probably extend support to the government and make the nation’s fiscal tightening “more sustainable.”

S&P affirmed Portugal’s BB long-term sovereign credit rating in a statement released today. That’s the same level as Hungary and Macedonia and two steps below investment grade, according to data compiled by Bloomberg. In January 2012, S&P followed Fitch Ratings and Moody’s Investors Service in cutting Portugal’s credit rating to non-investment grade.

“The outlook revision reflects additional evidence that European institutions will continue to support Portugal’s adjustment program, given the government’s commitment to budgetary and structural reforms,” S&P said.

Portugal may get an additional year to narrow its budget deficit as its economic outlook worsens, Finance Minister Vitor Gaspar said Feb. 20. The gross domestic product forecast for 2013 may be revised lower by about 1 percentage point during a review of the aid program that began on Feb. 25, he said. Gaspar’s last estimate was for GDP to contract 1 percent in 2013 before expanding 0.8 percent in 2014.

European Union finance ministers may next month commit to giving Ireland and Portugal more time to repay bailout loans, Economic and Monetary Affairs Commissioner Olli Rehn said on March 4. Portugal was already given more time in September to narrow its budget gap after tax revenue missed forecasts.

Weaker Economy

The EU and the International Monetary Fund will probably adjust the country’s “fiscal consolidation path to allow for weaker-than previously-assumed economic performance,” S&P said. “This makes Portugal’s adjustment process more sustainable, both economically and socially, and reduces the risk that it will not comply with the program.”

The Portuguese jobless rate rose to 16.9 percent in the fourth quarter. Unemployment averaged 15.7 percent in 2012, and the government predicts it will rise to 16.4 percent this year.

Portugal’s five-year bond yield fell as much as 16 basis points to 4.671 percent today, the lowest since December 2010. The 10-year yield fell 13 basis points to 6.01 percent at 10:22 a.m. in London. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds has narrowed to 4.5 percentage points from a euro-era record of 16 percentage points in January 2012.

“The key really is that S&P is leading the other two ratings agencies with this move, so that at the margin helps with euro sentiment,” said Sue Trinh, a Hong Kong-based senior currency strategist at Royal Bank of Canada.

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