“Portugal’s solvency is not in question,” Anthony Thomas, Moody’s London-based lead analyst for Portugal, said in a statement today. “But the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy’s ability to withstand fiscal consolidation and private-sector deleveraging mean its outlook may no longer be consistent with an A1 rating.”
The European Commission, the International Monetary Fund and the Organization for Economic Cooperation and Development forecast that Portugal’s economy will contract next year. Moody’s cut Portugal’s credit rating two steps to A1 on July 13. Standard & Poor’s also said on Nov. 30 it may lower the country’s rating, having already cut it to A- from A+ in April.
The Portuguese government plans to cut state workers’ wages and raise taxes to convince investors it can narrow the euro region’s fourth-biggest budget gap after Greece’s debt crisis led to a surge in borrowing costs for high-deficit nations. Ireland became the second euro country to seek a bailout, after Greece, and the first to request aid from the European Financial Stability Facility last month.
‘Doing the Rounds’
Moody’s doesn’t know if Portugal will ask for a bailout and doesn’t see any move to tap the European Financial Stability Facility as “negative,” Kathrin Muehlbronner, an analyst at Moody’s, said in a telephone interview today. Moody’s will evaluate the situation if Portugal does request a bailout, she said.
“It’s not entirely a surprise,” Orlando Green, assistant director of capital-markets strategy at Credit Agricole Corporate & Investment Bank in London, said about the Moody’s announcement today. “Moody’s, S&P have been doing the rounds. It’s generally been negative news for the euro zone,” he said in an interview on Bloomberg Television’s “The Pulse” with Andrea Catherwood.
Moody’s said on Dec. 15 it may cut Spain’s Aa1 credit rating and on Dec. 16 said it placed Greece’s Ba1 bond ratings on review for a possible downgrade. Ireland’s credit rating was cut five levels by Moody’s on Dec. 17.
Widening Spreads
The difference in yield between Portuguese 10-year bonds and German bunds, Europe’s benchmark, reached a euro-era record of 483 basis points on Nov. 11. The spread was at 356 basis points today. The cost of insuring Portuguese government debt rose 6 basis points to 482, according to CMA prices for credit- default swaps.
“The markets have remained open to the Portuguese government, but it is having to pay an elevated price, which if sustained will increase substantially its debt service costs over time,” Moody’s Thomas said.
Portugal doesn’t face any bond redemptions until April and has completed this year’s sales of debt. Borrowing costs rose at a Dec. 15 sale of 500 million euros ($658 million) of three- month bills.
The government is counting on exports such as paper and wood products to support economic expansion as it cuts spending. The budget forecasts GDP growth of 0.2 percent in 2011, slower than this year’s estimated 1.3 percent pace. Portugal’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest growth rates.
“In addition to fiscal austerity, at least a moderate pace of nominal GDP growth will be needed to stabilize and eventually reverse the currently adverse debt trajectory,” Moody’s said in the statement.
Contraction Forecast
The Paris-based OECD sees GDP growth of 1.5 percent this year, with the economy contracting 0.2 percent in 2011, as austerity measures kick in. The European Commission last month predicted a contraction of 1 percent.
Jorg Decressin, head of the IMF’s world economic studies division, said on Oct. 6 that the Portuguese economy may contract 1.4 percent next year if new deficit-cutting measures are taken into account.
Portugal’s 2011 budget includes the deepest spending cuts in more than three decades. In September, the government said it would trim the wage bill by 5 percent for public-sector workers earning more than 1,500 euros a month, freeze hiring and raise the value-added tax by 2 percentage points to 23 percent to help narrow a deficit that amounted to 9.3 percent of gross domestic product in 2009. Deficit Reduction
Portugal aims to cut its budget deficit to 7.3 percent of GDP this year and 4.6 percent in 2011, and to reach the EU limit of 3 percent in 2012.
The central government’s budget deficit narrowed in the 11 months through November, the first annual reduction in the shortfall this year, the Finance Ministry said yesterday. The gap narrowed 0.8 percent to 12.94 billion euros, as spending rose 2.6 percent and revenue rose 4 percent.
The deficit has narrowed at a faster pace since the start of the second half, shrinking 9.8 percent from a year earlier in the July-November period, as spending increased 0.6 percent and revenue gained 4.6 percent.
To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net.
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