Bloomberg News

Portugal’s Credit Rating Is Cut to Junk by S&P on Euro Crisis

January 15, 2012

(For more on the euro crisis, click on EXT4 <GO>.)

Jan. 14 (Bloomberg) -- Portugal’s credit rating was cut to below investment grade by Standard & Poor’s on Europe’s failure to resolve the region’s debt crisis.

The rating was lowered two levels to BB with a negative outlook, indicating a one-in-three chance of another downgrade within 12 months, S&P said late yesterday in an e-mailed statement. S&P in March cut the rating twice to BBB-, one level above junk status, and had a negative outlook on the country.

S&P follows Fitch Ratings and Moody’s Investors Service in downgrading Portugal’s debt to junk. The country’s rating was cut to below investment grade in July by Moody’s as the long- term government bond ratings were lowered to Ba2 from Baa1, while Fitch on Nov. 24 cut Portugal one level to BB+ from BBB-.

The downgrade reflects “deepening political, financial, and monetary problems within the euro zone, with which Portugal is closely integrated,” S&P said last night. It also stems from “sustained external financing pressures on Portugal’s private sector, and what these may imply for growth performance and, in turn, public finances.”

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro ($98.9 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal’s previous government followed Greece and Ireland in April in seeking a bailout and now aims to return to bond markets at the end of 2013.

Greek Spillover

“The debt restructuring process in Greece could further alienate potential investors in Portuguese government debt,” hurting the country’s chances of returning to capital markets in 2013, S&P said.

Portugal “regrets” the downgrade, which reflects a “significant” change in S&P’s methodology, the Finance Ministry said in an e-mailed statement. “S&P seems to be basing its decision on an analysis for the euro area as a whole, without taking into account the specific national situations.”

Greece and its creditors are discussing a cut in the face value of its debt as the country tries to avoid default. S&P estimated holders of Portuguese government debt could achieve an average recovery of 30 percent to 50 percent in the event of a default or debt restructuring.

‘Serious’ Risk

The IMF on Dec. 20 also said the European debt crisis is a “serious” risk to Portugal as the nation seeks to meet the targets of its financial aid program and return to bond markets in two years.

Finance Minister Vitor Gaspar on Nov. 16 said the second quarterly review of the country’s financial-aid program was “successful,” allowing it to receive another rescue-payment tranche of 8 billion euros. The so-called troika of the European Commission, the European Central Bank and the IMF said Portugal’s plan is “off to a good start” and the 2012 budget includes “bold and welcome measures.”

The 2012 budget includes a plan to eliminate the summer and Christmas salary payments for state workers earning more than 1,100 euros a month. Tax deductions will be reduced and the government increased the value-added tax rate on some goods. Spending cuts in 2012 represent 4.4 percent of gross domestic product, including reductions on health-care spending, while revenue increases represent 1.7 percent of GDP.

Deficit Reduction

The Portuguese government aims to trim the budget deficit from 9.8 percent of GDP in 2010 to 4.5 percent in 2012 and to the EU ceiling of 3 percent in 2013. Debt will peak at 106.8 percent in 2013, from 93.3 percent in 2010, before starting to decline, the government forecasts.

The austerity measures are hurting an economy with growth that has averaged less than 1 percent a year in the past decade, one of Europe’s weakest rates.

“Continued fiscal austerity without improving growth prospects could result in widespread unemployment, which could negatively affect social cohesion and political support for the EU/IMF program,” S&P said.

Portugal’s economy will shrink 3 percent in 2012, the only euro-area country to do so besides Greece, which is set to contract 2.8 percent, the European Commission forecast on Nov. 10. Portugal will return to growth in 2013, according to the commission.

--Editors: Jeffrey Donovan, Robin Meszoly.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Jim Silver in New York at jsilver@bloomberg.net.

To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net; Brad Skillman at bskillman1@bloomberg.net.


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