Moody's Puts Portugal Aa2 Rating On Downgrade Review - Full Text

London, 05 May 2010 -- Moody's Investors Service has today placed Portugal's Aa2 government bond ratings on review for possible downgrade, while the government's Prime-1 short-term rating was affirmed. Moody's expects that, in the event of a downgrade, Portugal's Aa2 ratings would fall by one, or at most two, notches. The review of Portugal's ratings -- which had been on negative outlook since October 2009 -- is expected to conclude within a three-month time horizon.

Today's rating action reflects the recent deterioration of Portugal's public finances as well as the economy's long-term growth challenges. "The review for possible downgrade will consider a repositioning of Portugal's ratings to reflect the potentially lasting deterioration in the government's debt metrics," says Anthony Thomas, Vice President-Senior Analyst in Moody's Sovereign Risk Group. "In the context of a small and slow-growing economy, such debt metrics may no longer be consistent with a Aa2 rating."

The weakening of Portugal's public finance position reflects the failure of successive administrations to consistently limit government budget deficits since Portugal joined the eurozone at its inception. "More recently, however, the government's has reiterated its objective to achieve or even surpass the deficit reduction targets published in its latest Stability and Growth Programme," says Mr. Thomas. "The well-structured debt profile means that refinancing risks are modest."

Moody's believes that increased risk discrimination in the financial markets may raise Portugal's financing costs for some time to come. Nonetheless, Moody's expects that debt service will remain very affordable in the near to medium term. Although its debt metrics may, on balance, turn out to be more consistent with a low Aa or a high A rating, the government's debt is neither unsustainable nor unbearable.

Portugal's growth challenges plus large fiscal deficits have led market participants to compare Portugal (and several other European countries) to Greece. Although Moody's believes that Greece faces far more serious fiscal difficulties than Portugal, the rating agency nevertheless sees an extended period of retrenchment for Portugal as inevitable until the country's domestic financial imbalances are corrected.

In addition to factors related to public debt sustainability, Moody's rating review will examine other aspects of the structural adjustment agenda -- in particular, the steps being taken by Portugal's policymakers to address the poor economic competitiveness and low domestic savings, which are at the root of the country's low trend growth rate. Moody's forecasts assume positive, albeit relatively slow, real economic growth.

"Portugal's growth problem is related more to its low productivity than its high costs per se," says Mr. Thomas. "The lack of a devaluation option creates stronger -- but not impossible -- headwinds for the country's economic recovery."

Portugal's country ceilings for bonds and bank deposits fall under the eurozone's regional ceilings and are therefore unaffected by this rating action.

The previous rating action on Portugal was implemented on 29 October 2009, when Moody's assigned a negative outlook to the government's Aa2 bond ratings.

The principal methodology used in rating the government of Portugal is Moody's Sovereign Bond Methodology, published in 2008, which 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.

London

Pierre Cailleteau

Managing Director

Sovereign Risk Group

Moody's Investors Service Ltd. - England

JOURNALISTS: 44 20 7772 5456

SUBSCRIBERS: 44 20 7772 5454

London
Arnaud Mares
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Anthony Thomas
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Comments

[zeroman]

this is hillarious. The us rating agencies are downgrading euro countries left and right. Where were they during the mortgage mess early on?  Could it be the u.s. govt is taking advantage of the euro demise with all aggressive intentions? this is the NEW FIAT WORLD WAR!!!!

[Missing_Link]

I'm sure Goldman arranged for the ratings agencies to put a hold on its downgrades until it had all the appropriate short positions in place.

[Hansel]

Nothing like hiring your rating agency hitmen to scare everyone with euros into buying U.S. treasuries.

[Mitchman]

The conspiracy theorists must be having a field day.

[bugs_]

Deep Shah