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Rating Action:

Moody's downgrades five Portuguese regional and local governments; outlooks negative

18 Mar 2011

Madrid, March 18, 2011 -- Moody's Investors Service has today implemented the following downgrades for Portuguese regional and local governments:

- City of Cascais: downgraded by two notches to A3 from A1

- City of Lisbon: downgraded by one notch to A3 from A2

- City of Sintra: downgraded by two notches to A3 from A1

- Autonomous Region of the Azores: downgraded by two notches to Baa1 from A2

- Autonomous Region of Madeira: downgraded by three notches to Baa2 from A2

The rating outlooks for these regional and local governments (RLGs) are negative. Today's rating actions conclude the review for possible downgrade of Portuguese RLGs initiated on 21 December 2010.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADES

Today's downgrades were prompted by Moody's downgrade of Portugal's sovereign rating to A3/negative from A1/under review for downgrade on 15 March 2011.

The downgrade of Portugal's government bond ratings has implications for the ratings of RLGs within the country given the close operational and financial linkages between the central government and its RLGs. "Although Portuguese RLGs maintain some autonomy over their financial management, they remain dependent upon transfers to fund their operations," explains Sebastien Hay, a Vice President and Senior Credit Officer in Moody's Sub-Sovereign Group. The central government also preserves a high degree of oversight on the sector via legislation, imposing strict limits on tax rates and debt levels.

CITIES OF SINTRA AND CASCAIS

Moody's highlights the weakening in the revenue flexibility of rated Portuguese municipalities over the past few years, given slowing tax-revenue growth (especially in property transfer tax). Moody's considers that the fiscal consolidation measures announced last week by the central government will not diminish the reliability of its transfers paid to Portuguese municipalities. Nevertheless, the rating agency believes that rated Portuguese municipalities are unlikely to have a sufficient independent financial capacity to permit their credit quality to be stronger than that of the sovereign itself. Moody's has therefore downgraded the ratings of Sintra and Cascais to A3 from A1, in line with the ratings of the sovereign.

CITY OF LISBON

The City of Lisbon was downgraded to A3 from A2, reflecting the challenges the city will face in limiting the growth of its operating expenditure so that it can pay its capital expenditure from surpluses and without adding to what is already a very high debt burden over the next two to three years. Nevertheless, Moody's views positively the slight decrease in Lisbon's debt-to-revenue ratio in 2010 and the city's plans to pay down a substantial portion of its commercial obligations in 2011 from asset sales, even if the sales may not all occur as planned this year. Going forward, Moody's believes that Lisbon will continue to operate under tight budget constraints in the form of low tax revenue growth, which maintains pressure on its rating.

AUTONOMOUS REGIONS OF THE AZORES AND MADEIRA

The downgrades of the Autonomous Regions of the Azores and Madeira reflect the substantial increase in their direct and indirect debt levels, a trend that Moody's believes is unlikely to reverse in the foreseeable future. The risks for the Autonomous Region of Madeira are heightened by its significantly higher debt metrics than those of Azores. These concerns are exacerbated by the regions' decrease in tax revenue, which is expected to recover only slowly, and their rigidity in operating expenditure imposed by the large share of healthcare and personnel costs.

RATIONALE FOR THE NEGATIVE OUTLOOKS

The outlook for all Portuguese RLGs is negative, reflecting primarily the weak prospects for growth in the Portuguese economy for the next two to three years, which will limit tax revenue going forward, whilst essential services and personnel costs will remain difficult to cut rapidly.

The last rating actions on Cascais, Lisbon, Sintra, Azores and Madeira were as follows:

- Cascais: Long-term issuer rating placed on review for downgrade on 21 December 2010.

- Lisbon: Long-term issuer rating placed on review for downgrade on 21 December 2010

- Sintra: Long-term issuer rating placed on review for downgrade on 21 December 2010.

- Azores: Long-term issuer rating placed on review for downgrade on 21 December 2010.

- Madeira: Long-term issuer rating placed on review for downgrade on 21 December 2010.

The principal methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, and The Application of Joint-Default Analysis to Regional and Local Governments published in December 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service 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.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Madrid
Sebastien Hay
VP - Senior Credit Officer
Sub-Sovereign Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Espana, S.A.
Barbara de Braganza, 2
Madrid 28004
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades five Portuguese regional and local governments; outlooks negative
No Related Data.
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