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Rating Action:

Moody's downgrades four Portuguese regional and local governments

07 Jul 2011

Madrid, July 07, 2011 -- Moody's Investors Service has today implemented the following rating actions on four Portuguese regional and local governments (RLGs):

- City of Lisbon: downgraded by four notches to Ba2 from Baa1, outlook negative

- City of Sintra: downgraded by four notches to Ba2 from Baa1, outlook negative

- Autonomous Region of the Azores: downgraded by four notches to Ba3 from Baa2, outlook under review for further downgrade

- Autonomous Region of Madeira: downgraded by four notches to B1 from Baa3, outlook under review for further downgrade

RATINGS RATIONALE

RATIONALE FOR DOWNGRADES

Today's downgrades were prompted by Moody's four-notch downgrade of the Government of Portugal's rating to Ba2 from Baa1 on 5 July 2011, with negative outlook. For more information, please refer to Moody's press release "Moody's downgrades Portugal's bond ratings to Ba2 from Baa1, negative outlook," published on 5 July 2011.

The downgrade of Portugal's government bond ratings has implications for the ratings of RLGs within the country given their close operational and financial linkages with the central government. Although Portuguese RLGs maintain some autonomy over their financial management, they remain dependent on transfers to fund their operations. Moreover, the central government also maintains a high degree of oversight on the sector via legislation, imposing strict limits on tax rates and debt levels. Thereby, Moody's believes that Portuguese RLGs are unlikely to have sufficient fiscal capacity to permit their credit quality to be stronger than that of the Sovereign itself.

The downgrades of the Autonomous Regions of the Azores and Madeira continue to reflect the significant increase in their direct and indirect debt levels in recent years, 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 substantially higher debt metrics than those of the Azores.

RATIONALE FOR THE NEGATIVE OUTLOOK ON SINTRA AND LISBON

The outlook for the municipalities of Sintra and Lisbon is negative and reflects: (i) the weak growth prospects for the Portuguese economy for the next two to three years, which will limit an increase in tax revenues going forward, whilst growth in operating expenditure will remain difficult to contain; (ii) the impact of increased political, budgetary and economic constraints for the central government and RLGs; and (iii) the uncertainty as to the extent and timing of fiscal consolidation measures that could apply to the RLG sector going forward.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Given the strong link to the sovereign rating described above, further downward revisions to the sovereign rating would result in downward adjustments for the ratings on these cities. Furthermore, significant consolidation efforts by the sovereign that would impact negatively on the cities' fiscal positions could apply downward pressure on the rating.

Stabilization of the outlooks or an upgrade to the ratings would require stabilization or upgrade of the sovereign rating.

RATIONALE FOR THE REVIEW FOR DOWNGRADE ON THE AZORES AND MADEIRA

Moody's decision to maintain the ratings of the Portuguese regions under review for further downgrade reflects the rating agency's view that regional governments and their related companies will face increasing difficulties in financing themselves going forward. The review for downgrade -- as opposed to the negative outlook assigned to the Sovereign's ratings -- aims to conclude in the next few weeks, during which time Moody's will re-examine documentation related to loans, bonds and derivative exposures, as well as credit facilities, to assess the regions' abilities to meet financing requirements. During the review, the rating agency will also assess the financial position of Azores's and Madeira's regional companies to make sure that any indirect or guaranteed debt called upon could be met by regional short term facilities and/or other means (e.g. budget savings released from expenditure cuts or extraordinary revenues).

WHAT COULD CHANGE THE RATING UP/DOWN

Following the review described above, Moody's could downgrade the ratings of these entities if our analysis indicates heightened financing challenges for these regions.

Stabilization of the outlooks or an upgrade to the ratings would require stabilization or upgrade of the sovereign rating in addition to an easing of financing pressures.

PRINCIPAL METHODOLOGIES

The principal methodologies used in these ratings 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. 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, parties not 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.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

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 on our website www.moodys.com for further information.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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 before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

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.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades four Portuguese regional and local governments
No Related Data.
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