London, 05 April 2011 -- Moody's Investors Service has today downgraded Portugal's long-term
government bond ratings by one notch to Baa1 from A3 and placed the rating
on review for possible downgrade. Concurrently, Moody's
placed the government's (P)Prime-2 short-term debt
rating on review for possible downgrade.
Moody's rating action was driven primarily by increased political,
budgetary and economic uncertainty, which increase the risk that
the government will be unable to achieve the ambitious deficit reduction
targets set out in the update of its Stability and Growth Programme for
2011-2014 and put its finances on a sustainable trajectory.
The main triggers for the one-notch downgrade and review include:
1. The uncertain political outlook, following the resignation
of the government after the rejection by the parliament of the additional
budget measures announced on 11 March and resulting reduction in the speed
and decisiveness of policy making;
2. The short- and medium-term funding challenges,
set in the context of the recently agreed European Stability Mechanism
(ESM), which contemplates debt restructuring as a distinct possibility;
3. The medium-term implications of last week's revisions
to the estimates for the budget deficit and outstanding government debt
for fiscal consolidation.
The limited migration of the rating to Baa1 (and not lower) in today's
action, reflects Moody's assessment that assistance would
be provided by the other members of the Eurozone if Portugal needs financing
on an expedited basis before it can obtain funds from the European Financial
Stability Facility (EFSF). Moody's believes the new government
will likely approach the facility as a matter of urgency.
The outcome of the review and the maintenance of the country's rating
within the Baa level will be critically influenced by the capacity of
the country to secure sustainable sources of funding over the medium term
and the ability of its political institutions to stay the course of fiscal
consolidation and structural reforms.
Portugal's country ceilings for bonds and bank deposits are unaffected
by today's rating action and remain at Aaa (in line with the Eurozone's
In Moody's most recent rating action on Portugal on 15 March 2011,
the rating agency stated that the commitment of both major parties to
fiscal consolidation was an important reason why Portugal's rating
had remained at the low end of the A rating range. The failure
of the parties to reach agreement over a further tightening of fiscal
policy necessary to achieve the budget deficit target of 4.6%
for this year -- and to implement further structural reforms needed
to increase the flexibility of the labour markets, amongst other
things -- has meant that this assumption has had to be qualified.
Furthermore, the political vacuum created by the resignation of
the government at a critical juncture illustrates the uncertainties surrounding
the speed and decisiveness of policy making now and in the future.
It also raises questions about the government's ability --
whatever the views of the respective parties -- to achieve the ambitious
structural changes required.
It is very unlikely that the long-term debt markets will reopen
to the Portuguese government or to the Portuguese banks to any meaningful
extent until the government is able to take action to dispel doubts over
its commitment and ability to implement the fiscal programme. That
in turn raises the probability that the government will remain reliant
on its Eurozone partners for support once the EFSF expires and the ESM
is introduced. While the review period is intended to allow time
to assess the implications of recent announcements by the European authorities
for the medium term credit environment in Europe, it seems increasingly
clear that any ESM lending will first require a solvency analysis by EU
officials, and if there are doubts over a government's solvency
-- which could be the case if Portugal were to remain reliant on
support funding for a sustained period -- private creditors would
be expected to bear losses as a condition of continued support.
Moody's also commented that although it was unclear how the government
was going to fund its debt refinancing needs over the next few months,
Moody's believes (based on its conversations with government officials)
that the Portuguese authorities have adequate contingency plans in place
should the government be unable to raise the needed funds in the market.
In particular, Moody's believes ample and timely assistance
would very likely be provided by the other members of the Eurozone if
Portugal needed funds on an expedited basis, before it could obtain
funds from the EFSF.
FACTORS TO BE CONSIDERED IN THE REVIEW
The resolution of the political predicament will have to await the general
elections scheduled for 5 June and the consequent formation of a new government.
The latter could take up to a month after the polls and the outcome is
uncertain. Moody's central case remains that the incoming
government would seek to demonstrate its continued commitment to fiscal
consolidation. However, it is not clear how much support
that government will command in the new parliament and the implications
of this for its ability to implement an ambitious fiscal programme.
As part of the review, Moody's will examine the policy framework
introduced by the new government. Moody's rating conclusion
will be heavily influenced by the scope, nature and achievability
of measures announced to address the country's budgetary and economic
Following the rejection of the measures announced on 11 March, Moody's
believes that the government's current cost of funding is nearing
a level that is unsustainable, even in the short-term.
A critical part of the review will focus on the ability of the government
to secure financing at a less elevated level, either through the
capital markets or through EU support. In the highly likely event
that the new government approaches the EFSF for assistance, Moody's
will consider any subsequent agreement to assess both its impact on the
government's debt metrics and economic structures, but also
the likely implementation risks. At the same time, the rating
agency acknowledges that the additional pressure that an EFSF programme
could exert on fiscal consolidation would be credit-supportive.
Accessing the EFSF may also lead to a reduction in financing costs whilst
Portugal draws on the facility. But as noted above it also raises
questions over when the government would be able to re-access the
capital markets and on what terms. The capital markets are increasingly
focusing on possible downside risks to Portugal accessing the EFSF's
proposed successor, the ESM. Therefore, the rating
agency will consider and discuss with the authorities the likelihood of
Portugal being able to re-enter the capital markets before the
EFSF expires in mid-July 2013 and the implications for creditors
if it cannot and instead needs to access the ESM.
Finally, Moody's will consider the impact of last week's revision
to budget deficit and government debt figures. The rating agency
acknowledges that the revision does not stem from incorrect reporting
in the past and that whilst not previously on the government's balance
sheet, the information was known. Our analysis will seek
to confirm that the revision does not materially impact the fiscal dynamics
or that if it does, the government is able to take compensatory
Given that elections are being held to resolve the political situation,
the review may take longer than its usual three-month review cycle.
Nonetheless, the rating agency expects to conclude by the end of
July. Moody's will revisit the rating sooner if (i) doubts
emerge with respect to Portugal's potential support from other Eurozone
members before the government can access the EFSF, or (ii) it appears
likely that the incoming government will be less committed to fiscal consolidation
and structural reform.
PREVIOUS RATING ACTION AND THE METHODOLOGY
Moody's previous rating action on Portugal was implemented on 15 March
2011, when the rating agency downgraded the government's long-term
debt rating by two notches to A3 and assigned a negative outlook.
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 Moody's "Sovereign Bond
Ratings Methodology", which was published in September 2008 and
is available on www.moodys.com.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
This rated entity participated in the credit rating process. The
rated entity or its related third party, if any, did provide
the rating committee access to the books, records and other relevant
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The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
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in assigning a credit rating is of sufficient quality and from sources
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Please see ratings tab on the issuer/entity page on Moodys.com
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Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
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MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
Moody's Investors Service Ltd.
Moody's downgrades Portugal's bond ratings to Baa1 from A3, still under review down
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