From the Press Release:
Rating action concludes review for possible downgrade
London, 13 July 2010 -- Moody's Investors Service has today downgraded
bond ratings to A1 from Aa2. The two-notch downgrade reflects
the rating agency's following conclusions:
1.) The Portuguese government's financial strength will continue
to weaken over the medium term, as evidenced by ongoing deterioration
in the country's debt metrics, such as debt to GDP and debt
to revenues; and
2.) The Portuguese economy's growth prospects are likely
to remain relatively weak unless recent structural reforms bear fruit
over the medium to longer term.
The rating outlook is now stable, with the upside and downside risks
Today's rating action concludes the review for possible downgrade that
Moody's initiated on 5 May 2010.
Separately, Moody's has also affirmed Portugal's short-term
issuer rating of Prime-1 with a stable outlook. Portugal
falls under the Eurozone's Aaa regional ceilings for bonds and bank
deposits, which were unaffected by the Portuguese government's
RATIONALE FOR DOWNGRADE
Moody's believes that the Portuguese government's financial
strength will continue to weaken over the medium term, as evidenced
by the recent and ongoing deterioration in the country's debt metrics.
"The Portuguese government's debt-to-GDP and
debt-to-revenues ratios have risen rapidly over the past
two years," says Anthony Thomas, Vice President -
Senior Analyst in Moody's Sovereign Risk Group. "This
deterioration came about due to the government's anti-crisis
measures and the operation of the budget's automatic stabilizers,
such as higher unemployment benefits, when the economy went into
Looking ahead, Moody's expects the government's debt
metrics to continue to deteriorate for at least another two to three
with the debt-to-GDP and debt-to-revenues
ratios eventually approaching 90% and 210%, respectively,
before stabilizing once the budget has moved back into a primary surplus
"Moody's also remains concerned about the economy's
medium-term growth potential," says Thomas.
The analyst says it is not yet clear whether the reforms will boost
sufficiently to allow the deterioration in the country's debt metrics
to eventually reverse, especially as the labour market reforms are
relatively recent. This would imply that Portugal's government
would remain relatively highly indebted for the foreseeable future.
RATIONALE FOR STABLE OUTLOOK
Whilst the government's debt metrics have undoubtedly deteriorated,
Moody's believes that they will stabilise at levels that are
with a strong A rating. In our view, upside and downside
risks to that base case scenario are evenly balanced. If in addition
to recent fiscal consolidation efforts, the structural adjustments
undertaken by both government and private sector achieve a boost in
and growth potential, the government's debt metrics and the
country's external position could strengthen beyond current
At the same time, however, Moody's notes that a more
severe deterioration in the country's debt metrics in the event
in the event of higher interest rates or weaker economic growth cannot
be completely ruled out.
For further information, please refer to Moody's Special Comment
entitled "Key Drivers of Portugal's Downgrade to A1", which
is available on www.moodys.com.
PREVIOUS RATING ACTION & METHODOLOGY
Moody's last rating action affecting Portugal was implemented on
5 May 2010, when the rating agency placed Portugal's Aa2 government
bond ratings on review for possible downgrade, while the government's
Prime-1 short-term rating was affirmed. Prior to
that, Moody's last rating action on Portugal was taken on
29 October 2009 when the rating agency changed the outlook on the
Aa2 ratings to negative from stable.
The principal methodology used in rating the government of Portugal is
"Moody's Sovereign Bond Ratings", which was published
in September 2008 and can be found at www.moodys.com in
the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.