Portugal’s Rating Raised by Moody’s on Improving Fiscal Health

Portugal’s government bond rating was raised to Ba2 from Ba3 by Moody’s Investors Service, which cited faster-than-projected improvement in fiscal health.

The rating, still below investment grade, was placed on review for possible further upgrade. The budget deficit was reduced a full percentage point of gross domestic product more than envisaged last year, indicating the government’s strong commitment to fiscal consolidation, New York-based Moody’s said in a statement today. The bond rating outlook had been revised to stable from negative on Nov. 8.

Portugal on May 17 will follow Ireland in exiting its three-year bailout program without the safety net a precautionary credit line. The government announced the decision about the bailout exit on May 4 after the country last month held its first bond auction since requesting the 78 billion-euro ($107 billion) rescue from the European Union and the International Monetary Fund in 2011.

The country’s debt is also rated below investment grade by Standard & Poor’s and Fitch Ratings. S&P earlier today revised Portugal’s rating outlook to stable from negative. Fitch on April 11 revised the outlook on Portugal to positive. Ireland no longer has a junk rating.

Bond markets often disregard rating and outlook changes. France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, tumbled to a record 1.66 percent last year.

Yields Decline

Portugal’s borrowing costs have dropped since the beginning of 2012, helped by signs of economic recovery and a market rally spurred by the European Central Bank’s pledge to do what it takes to defend the euro. The 10-year bond yield dropped to as low as 3.453 percent yesterday, the least since 2006, after reaching more than 18 percent in January 2012. Portugal pays interest of about 3 percent on its bailout loans.

Portuguese debt agency IGCP said in an April 2 presentation that it ended 2013 with what it calls a treasury cash position of 15.3 billion euros. The country has already started to obtain funding for 2015, the IGCP said on Feb. 11. It has raised 6.25 billion euros selling bonds through banks so far this year as signs of economic recovery spurred a rally in higher-yielding European fixed-income assets.

While Portugal emerged from its longest recession in at least 25 years in the second quarter of 2013, Prime Minister Pedro Passos Coelho still has to trim spending in 2014 and 2015 to meet budget deficit targets after relying mostly on tax increases in 2013.

Budget Target

The government targets a budget deficit of 4 percent of gross domestic product in 2014 and forecasts the shortfall will fall below the EU’s 3 percent limit in 2015, when it aims for a 2.5 percent gap. The budget deficit narrowed to 4.9 percent in 2013, when debt reached 129 percent of GDP.

The Portuguese government forecasts the economy will grow 1.2 percent in 2014 and 1.5 percent in 2015, after contracting 1.4 percent in 2013. It projects the unemployment rate will drop from 16.3 percent in 2013 to 15.4 percent in 2014 and 14.8 percent in 2015.

From the start of this year, Fitch, Moody’s, S&P and DBRS Inc. had to release announcement schedules for ratings decisions under European Union rules introduced in the wake of the region’s debt crisis. Assessors will be restricted to three judgments per year on sovereign borrowers that haven’t asked or paid for a grade, and will need to review ratings at least every six months.

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