Portugal Credit Rating Cut to Junk

Moody’s Investors Service continued its world tour of tearing into sovereignties by taking another hack at Portugal’s already troubled credit rating. But the drop seems to have more to do with the debt mess in another European Union member nation more than its own.

Moody's Investors Service downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Two key factors drove the decision, according to a Moody’s announcement Wednesday:
  1. The growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition.
  2. Heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilization targets set out in its loan agreement with the EU and International Monetary Fund (IMF) because of requirements such as reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.

However, beyond those statements, it appears Moody’s outlook on Portugal may be most impacted by the collateral damage caused by the need for a second bailout package by Greece, whose prospects of getting out of debt by conventional means seems to trail nearly every nation on the planet, save some Sub-Saharan African nations. Moody’s noted the following:

“European policymakers have grown increasingly concerned about the shifting of Greek debt held by private investors onto the balance sheets of the official sector. Should a Greek restructuring become necessary at some future date, a shift from private to public financing would imply that an increasingly large share of the cost would need to be borne by public sector creditors…Although Portugal's Ba2 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduces the likelihood that Portugal will soon be able to regain market access on sustainable terms.”

Brian Shappell, NACM Staff Writer

No comments:

Post a Comment