London, 05 July 2011 -- Moody's Investors Service has today downgraded Portugal's long-term
government bond ratings to Ba2 from Baa1 and assigned a negative outlook.
Concurrently, Moody's has also downgraded the government's short-term
debt rating to (P) Not-Prime from (P) Prime-2. Today's
rating action concludes the review of Portugal's ratings initiated
on 5 April 2011.
The following drivers prompted Moody's decision to downgrade and
assign a negative outlook:
1. The growing risk that Portugal will require a second round of
official financing before it can return to the private market, and
the increasing possibility that private sector creditor participation
will be required as a pre-condition.
2. Heightened concerns that Portugal will not be able to fully
achieve the deficit reduction and debt stabilisation targets set out in
its loan agreement with the European Union (EU) and International Monetary
Fund (IMF) due to the formidable challenges the country is facing in reducing
spending, increasing tax compliance, achieving economic growth
and supporting the banking system.
RATINGS RATIONALE
The first driver informing today's downgrade of Portugal's
sovereign rating is the increasing probability that Portugal will not
be able to borrow at sustainable rates in the capital markets in the second
half of 2013 and for some time thereafter. Such a scenario would
necessitate further rounds of official financing, and this may require
the participation of existing investors in proportion to the size of their
holdings of debt that will become due.
Moody's notes that European policymakers have grown increasingly
concerned about the shifting of Greek debt held by private investors onto
the balance sheets of the official sector. Should a Greek restructuring
become necessary at some future date, a shift from private to public
financing would imply that an increasingly large share of the cost would
need to be borne by public sector creditors. To offset this risk,
some policymakers have proposed that private sector participation should
be a precondition for additional rounds of official lending to Greece.
Although Portugal's Ba2 rating indicates a much lower risk of restructuring
than Greece's Caa1 rating, the EU's evolving approach
to providing official support is an important factor for Portugal because
it implies a rising risk that private sector participation could become
a precondition for additional rounds of official lending to Portugal in
the future as well. This development is significant not only because
it increases the economic risks facing current investors, but also
because it may discourage new private sector lending going forward and
reduce the likelihood that Portugal will soon be able to regain market
access on sustainable terms.
The second driver of today's rating action is Moody's concern
that Portugal will not achieve the deficit reduction target -- to
3% by 2013 from 9.1% last year as projected in the
EU-IMF programme -- due to the formidable challenges the country
is facing in reducing spending, increasing tax compliance,
achieving economic growth and supporting the banking system. As
a result, the country may be unable to stabilise its debt/GDP ratio
by 2013. Specifically, Moody's is concerned about the
following sources of risk to the budget deficit projections:
1) The government's plans to restrain its spending may prove difficult
to implement in full in sectors such as healthcare, state-owned
enterprises and regional and local governments.
2) The government's plans to improve tax compliance (and,
hence, generate the projected additional revenues) within the timeframe
of the loan programme and, in combination with the factor above,
may hinder the authorities' ability to reduce the budget deficit
as targeted.
3) Economic growth may turn out to be weaker than expected, which
would compromise the government's deficit reduction targets.
Moreover, the anticipated fiscal consolidation and bank deleveraging
would further exacerbate this. Consensus growth forecasts for the
country have been revised downwards following the EU/IMF loan agreement.
Even after these downward revisions, Moody's believes the
risks to economic growth remain skewed to the downside.
4) There is a non-negligible possibility that Portugal's
banking sector will require support beyond what is currently envisaged
in the EU/IMF loan agreement. Any capital infusion into the banking
system from the government would add additional debt to its balance sheet.
Moody's acknowledges that its earlier concerns about political uncertainty
within Portugal itself have been largely resolved. Portugal's
national elections on 5 June led to the formation of a viable government,
both components of which had campaigned on the basis of supporting the
EU-IMF loan agreement negotiated by the previous government.
Moody's also acknowledges the policy initiatives announced at the
end of June demonstrate the new Portuguese government's commitment
to the programme. However, the downside risks (as detailed
above) are such that Moody's now considers the government long-term
bond rating to be more appropriately positioned at Ba2. The negative
outlook reflects the implementation risks associated with the government's
ambitious plans.
WHAT COULD CHANGE THE RATING UP/DOWN
Developments that could stabilise the outlook or lead to an upgrade would
be a reduction in the likelihood that private sector participation might
be required as precondition for future rounds of official support or evidence
that Portugal is likely to achieve or exceed its deficit reduction targets.
A further downgrade could be triggered by a significant slippage in the
execution of the government's fiscal consolidation programme,
a further downward revision of the country's economic growth prospects
or an increased risk that further support requires private sector participation.
PREVIOUS RATING ACTION AND THE METHODOLOGY
Moody's previous rating action on Portugal was implemented on 5 April
2011, when the rating agency downgraded the government's long-term
debt rating by one notch to Baa1 and placed it on review for further possible
downgrade. It also downgraded the government's short-term
debt rating to (P) Prime-2 from (P) Prime-1.
The principal methodology used in this rating was Sovereign Bond Ratings
Methodology was 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 relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
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in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
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and cannot in every instance independently verify or validate information
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Service(s) to the rated entity or its related third parties within the
three years preceding the credit rating action. Please see the
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page on www.moodys.com for further information on the meaning
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Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
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the lead rating analyst and to the Moody's legal entity that has issued
the rating.
London
Anthony Thomas
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
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New York
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service, Inc.
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Moody's downgrades Portugal to Ba2 with a negative outlook from Baa1
