New York, March 27, 2013 -- Moody's Investors Service has today affirmed the Republic of Portugal's
Ba3 government bond ratings and negative outlook.
The drivers for maintaining the negative outlook on Portugal's sovereign
ratings are:
1.) The euro area's continued vulnerability to shocks emanating
from the regional debt crisis, most recently the agreement by the
European Union (EU) to the "bail-in" of bank deposits
to raise part of the funds needed for Cyprus' financial rescue.
2.) Portugal's very high level of government debt and its
continued large deficit.
3.) The country's weak economy, which is likely to
undergo a larger-than-expected contraction this year,
and the risks this poses to the stabilization of Portugal's debt
metrics in 2014-15.
The drivers for affirming Portugal's Ba3 sovereign ratings are:
1.) Portuguese policymakers' significant progress in achieving
fiscal consolidation and implementing structural reforms in the context
of the economic adjustment programme by the EU and International Monetary
Fund (IMF).
2.) Portugal's progress in regaining market access in recent
months, a prerequisite for the country to successfully exit the
EU/IMF support programme in May 2014 without needing a second bailout.
RATINGS RATIONALE
RATIONALE FOR MAINTAINING PORTUGAL'S NEGATIVE RATING OUTLOOK
The first driver underlying Moody's decision to maintain a negative
outlook the Portugal's Ba3 sovereign rating is the country's
susceptibility to euro-area-related event risk, mainly
because of its very high debt levels and subdued growth prospects.
Such risks were most recently evidenced by the EU's unprecedented
decision to fund Cyprus' financial rescue by imposing a levy on
bank deposits above a certain size. The move has significantly
heightened fears surrounding the safety of bank deposits in other European
systems. More generally, Moody's believes that Portugal's
vulnerability to wider euro area stresses has been reaffirmed by euro
area policymakers' handling of the Cyprus crisis, the increased
risk tolerance apparent in their actions, and investors' uncertain
risk assessment prompted by a more uncompromising and less predictable
approach to crisis management.
The second driver underpinning the negative outlook on Portugal's
sovereign rating is the country's continued high debt stock,
which at an estimated 123% of GDP (end-2012) is currently
one of the highest among Moody's rated sovereigns. Although
more cuts in the structural fiscal balance are envisaged for 2013-15,
the rating agency expects Portugal's general government gross debt-to-GDP
ratio to rise further to over 124%. In addition, Portugal
is targeting a government deficit level of 5.5% of GDP in
2013. The progressive postponement of the debt peak due to a delay
in lowering the deficit to less than 3% of GDP casts some doubt
on when the debt will begin to decline and at what pace.
The third driver behind the negative outlook is Moody's expectation
of a larger-than-expected contraction in economic growth.
The rating agency now projects that Portugal's real GDP will shrink
by 2% this year, nearly twice the level Moody's had
previously forecast, and that the country will achieve a modest
recovery of just 0.5% in 2014. The ongoing recession
has been the main reason that revenue shortfalls have persisted and has
contributed to the further deterioration in the government's debt
metrics. Moreover, the weak asset quality of the Portuguese
banking system could be exacerbated by these trends, posing the
risk that additional government funding for the system will be required,
including the use of remaining bank solvency funds.
RATIONALE FOR AFFIRMING THE Ba3 RATINGS
The primary driver underpinning Moody's decision to affirm Portugal's
Ba3 rating is the Portuguese government's comprehensive response
to the economy's structural weaknesses, most notably institutional
reform in the public sector, the tax system and the labour and product
markets, within the context of its EU/IMF economic adjustment programme.
The government achieved a substantial cyclically-adjusted fiscal
consolidation of more than 4% of GDP in 2011-12, excluding
all one-off measures, even though the economy contracted
by a cumulative five percentage points relative to its 2010 levels.
Nonetheless, the rating agency notes that achieving the programme's
goals remains challenging for Portugal given the interplay between public
finances and weak macroeconomic conditions.
The second driver informing the rating affirmation is the steady progress
that Portugal has made in regaining market access. Since July 2012,
the Portuguese government has been issuing debt that will mature beyond
the May 2014 expiry of its EU/IMF programme with progressively lower interest
rates. This debt issuance implies a recovery of investor confidence,
and has allowed the Portuguese government to pre-finance a portion
of its gross borrowing needs for 2014. In addition, the EU's
extension of Portugal's debt repayment obligations eases the country's
refinancing requirements at a time when its economy will be recovering
from a three-year-long recession and when European debt
markets are likely to still be susceptible to event risk.
WHAT COULD MOVE THE RATING DOWN/UP
Moody's would consider downgrading Portugal's sovereign ratings
in the event of a further significant rise in the government's debt
ratio as a result of an inability to sustain sufficiently large primary
surpluses, which would in turn lead to a second bailout.
The rating agency would also view negatively any renewed increase in Portugal's
debt costs stemming from a loss of market confidence in the Portuguese
economic and fiscal recovery and/or in euro area policymakers' ability
to contain the euro area debt crisis.
Conversely, Moody's would consider raising Portugal's
rating outlook and eventually upgrading the country's government
bond ratings if the government's financial balance, excluding
interest payments, were to move into a surplus large enough for
the country's debt-to-GDP ratio to stabilise and then
begin to decline. Moody's would also view positively the
IMF and EU's approval of external monitoring or a precautionary
credit line following the expiry of the current economic adjustment programme
that would qualify Portugal for the ECB's Outright Monetary Transactions
(OMT) scheme.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Kristin S Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Jan Sebastian Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's affirms Portugal's Ba3 ratings and negative outlook
