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Fitch Downgrades Portugal To AA-, Outlook Negative, Beatdown Of Euro Ensues
The rumors yesterday about a Portuguese downgrade ended up being true, courtesy of Fitch. Portugal to Bund spread widens 4 bps to 125bps, all European spreads wider also as a result. Euro dumped and breaks 1.35 support, last seen in mid 1.33 range.
Full Fitch text.
Fitch Ratings: Fitch Ratings has downgraded Portugal's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'AA-' from 'AA'. The agency has simultaneously affirmed Portugal's Short-term foreign currency rating at 'F1+' and Country Ceiling at 'AAA'. The Outlooks on the Long-term IDRs are Negative.
"A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal's creditworthiness," said Douglas Renwick, Associate Director in Fitch's Sovereign team. "Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than EU15 peers, which will put pressure on its public finances over the medium term."
The downgrade reflects significant budgetary underperformance in 2009. The general government deficit in that year was 9.3% of GDP, versus 6.5% of GDP forecast by Fitch last September. This has significantly increased the scale of the fiscal challenge to stabilise and reduce debt over the medium term. The government will need to implement sizeable consolidation measures from next year, on top of the reversal of the fiscal stimulus this year, in order to meet the 3% of GDP deficit target by 2013. If this is achieved, public debt/GDP will peak at around 90% in 2013.
The Negative Outlook reflects Fitch's concern about the potential impact of the global economic crisis on Portugal's economy and public finances over the medium term, given the country's existing structural weaknesses and high indebtedness across all sectors of the economy. Portugal's GDP per capita and trend growth are significantly below the 'AA' median, which reduces debt tolerance relative to other high-grade
sovereigns.
Fitch considers the government's recently-announced consolidation plans to be broadly credible, incorporating a high level of detail underpinning a largely expenditure-based adjustment and reasonable macroeconomic assumptions. It builds on a track record of public wage bill reduction over 2005-2008 and significant achievements in public pension reform. However, the planned deficit adjustment is back-loaded and the risk of macroeconomic disappointment (with knock-on effects to the deficit) is significant, particularly in the latter years of the government's projections (2012-13). Further fiscal and/or economic
underperformance in 2010 and 2011 could lead to another downgrade. Conversely, evidence that Portugal is entering a sustained recovery and that budgetary targets are being met, along with further structural
reforms to enhance the productivity and competitiveness of the economy, would ease downward pressure on the rating.
The government's liquidity position is relatively favourable. Medium- and long-term refinancing needs are not high, with only a single EUR5.6bn bond redemption due in May, and EUR5.9bn of bonds raised in the year to date. Although the stock of short-term debt in Portugal as a share of GDP is higher than most EU15 peers, average residual maturity of the debt stock is reasonable at 6.1 years and the budget is not overly sensitive to near-term interest rate shocks. Fitch believes that the likelihood of the government facing a liquidity crisis is low.
Portuguese GDP per capita (in purchasing power parity terms) was USD22,080 in 2008, under two thirds of the 'AA'-range median of USD34,400, reflecting the greater share of low value-added activity in the economy relative to peers. Portugal's relative lack of economic flexibility and weak export performance compared to peers has impeded growth over the last decade. While recent structural reforms have sought to improve productivity and international competitiveness, the sovereign credit outlook remains constrained by uncertainty over the potential growth rate of the economy. Furthermore, Portugal's domestic and external indebtedness has greatly increased since it joined the euro area in 1999, exacerbating downside risks to medium-term growth.
Portugal's sovereign ratings are supported by a relatively strong banking system, membership of the euro area and low historical volatility of inflation, growth and fiscal receipts, as well as a moderate debt service burden. The ratio of debt interest payments to fiscal revenue is also expected to remain below 10% into 2011. Fitch also recognises that, despite the minority position of the governing Socialist Party, there is broad political consensus on the need for structural and fiscal reform. Although it is a risk, Fitch does not expect significant government instability which could upset the passage of consolidation legislation.
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Yuan devaluation looking increasingly possible
Let's give Fitch a rating for the worth and credibility of their ratings. That would be a CCC.
Ok, so it's not good news... maybe we will only go up 0.5% since we still have the Bofa accounting fraud to compensate.
Gonna be fun watching the PPT try to paint the tape green today.
Bring it on Obozo, BRING IT ON! The US's is the biggest bankruptcy in the history of mankind and USG minion Fitch downgrades...Portugal...ROFL! Dow 360000000 - here we come!
This should be GREAT news for the US stock market.
All news means buy stocks..... just watch. We should be green by end of day.
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