S&P Downgrades Portugal Again To BBB-/A-3, Outlook Negative, Still Somehow Investment Grade

Tyler Durden's picture

From S&P, although nothing new here. EURUSD does not even blink on the news:


  • The concluding statement of the European Council meeting of March 24-25, 2011, addressing the terms under which EU sovereigns may borrow from the European Stability Mechanism (ESM) confirms our previously published expectations that (i) sovereign debt restructuring is a potential pre-condition to borrowing from the ESM, and (ii) senior unsecured government debt will be subordinated to ESM loans.
  • Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers, and represent a major departure from the current European Financial Stability Facility (EFSF) regime whereby sovereign EFSF loans rank pari passu with a borrowing sovereign's commercial debt.
  • Given Portugal's weakened capital market access and its likely considerable external financing needs in the next few years, it is our view that Portugal will likely access the EFSF and thereafter the ESM.
  • While we believe Portugal's public sector debt trajectory could start to decline in 2013, thereby creating the possibility that Portugal may be able to obtain ESM funding without being required to restructure its debt (based in part upon our reading of the "sustainable path" language in the EC's concluding statement), the issue of subordination remains.
  • We are therefore lowering our sovereign credit ratings on Portugal to 'BBB-/A-3'.
  • The negative outlook reflects our view that the macroeconomic environment could weaken beyond our current expectations and that a political impasse could undermine the effective implementation of Portugal's adjustment program, leading to non-negligible policy slippages.

Rating Action

On March 29, 2011, Standard & Poor's Ratings Services lowered its sovereign credit ratings on the Republic of Portugal to 'BBB-/A-3' from 'BBB/A-2'. At the same time, the ratings on Portugal were removed from CreditWatch with negative implications, where they were placed on Nov. 30, 2010. The outlook is negative. The 'AAA' transfer and convertibility assessment is unchanged.

Standard & Poor's will hold a teleconference today to discuss the above rating actions. The call will begin at:

4:30 p.m. British Summer Time,

5:30 p.m. Central European Time, and

11:30 a.m. Eastern Time.

See section "Teleconference Information" toward the end of the text for access  details.


The downgrade reflects our view of the concluding statement of the European Council (EC) meeting of March 24-25, 2011, that confirms our previously published expectations that (i) sovereign debt restructuring is a possible pre-condition to borrowing from the European Stability Mechanism (ESM), and (ii) senior unsecured government debt will be subordinated to ESM loans. Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers.

The EC's concluding statement addresses the issues of sovereign debt restructuring and government bond subordination in items 1 and 3 of the ESM's term sheet (see "European Council Conclusions" below).

According to the EC's concluding statement: "If, on the basis of a sustainability analysis, it is concluded that a macro-economic program cannot realistically restore the public debt to a sustainable path, the beneficiary Member State will be required to engage in active negotiations in good faith with its creditors to secure their direct involvement in restoring debt sustainability. The granting of the financial assistance will be contingent on the Member State having a credible plan and demonstrating sufficient commitment to ensure adequate and proportionate private sector involvement."

"Like the IMF, the ESM will provide financial assistance to a Member State when its regular access to market financing is impaired. Reflecting this, Heads of State or Government have stated that the ESM will enjoy preferred creditor status in a similar fashion to the IMF, while accepting preferred creditor status of IMF over ESM."

It is our view that high current account deficits accumulated over the past 10 years resulted in Portugal's substantial net external indebtedness, with gross external debt exceeding 500% of current account receipts (CARs), and gross financing requirements exceeding 200% of CARs annually in the whole forecast period until 2014. In our view, these financing requirements make it likely that Portugal will access the European Financial Stability Facility (EFSF; AAA/Stable) and, in 2013, ESM funding.

The outlook for Portugal's GDP performance is highly uncertain and will depend significantly on the capacity of the relatively small and closed Portuguese economy to build exports from the currently relatively low base of 30% of GDP. Following last week's resignation of Portugal's minority government, we assume that a new government will be formed by the end of the second quarter 2011. We expect the next government will agree to further fiscal and structural reforms
as part of an EU/IMF program. However, timing and implementation risks remain against the backdrop of an uncertain outlook for the economy and the financial sector.

Under current policies, Portugal's fiscal deficit is likely to exceed the targets established in the Stability and Growth Programme by around 3% of GDP in cumulative terms between 2011-2014; this would still imply that general government debt to GDP would begin to decline in 2013, based on our nominal GDP and interest rate assumptions. However, the uncertain outlook on the economy means that there are sizable downside risks to this relatively benign scenario, given the sensitivity of tax receipts to domestic demand and to imports, amid pressures on commercial banks to tighten credit.

If the government demonstrates that a macroeconomic program can realistically put the public debt trajectory onto a sustainable path, we are of the view, based on our reading of the concluding statement of the EC meeting, that Portugal may be able to obtain funding from the ESM without restructuring its existing debt in 2013, thus avoiding the timing disruption inherent in a restructuring. Nevertheless, any ESM borrowings would be senior to Portugal's government bonds. The seniority of ESM borrowings (and the consequent subordination of government bonds) in our view reduces the prospect of timely repayment to government bondholders, and likely also results in lower recovery values.


The negative outlook reflects our view of the risks to Portugal's fiscal performance from a sustained weakening in domestic demand, as government austerity measures and weak credit stimulus weigh on incomes. Portugal still faces sizable twin deficits and their reduction will stress policymakers' resolve in the face of what we believe will become an increasingly hostile public opinion. Risks of a challenging economic and financial environment could negatively affect asset quality and profitability in the Portuguese financial system, potentially triggering the need for capital support from the

If, contrary to our baseline assumption, the next government deviates from the current fiscal targets or if bank recapitalization cost exceeds 3% of GDP, we could lower the ratings further.

On the other hand, if Portugal achieves better-than-anticipated fiscal performance compared to our current forecast, achieves faster debt reduction by 2013, continues to implement growth-enhancing reforms, maintains its pace of strong export growth, and thus reduces its external financing gap, we could revise the outlook to stable.

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oogs66's picture

greece also downgraded

TheGreatPonzi's picture

DOW +5% to celebrate this.

John McCloy's picture

You would think these agencies would learn to downgrade prior to governments collapse.

oogs66's picture

And why do they think they can still differentiate  BBB+ from BBB from BBB- when its clear that they can barely tell the difference between AA and BBB! 

oogs66's picture

The guy who does Ireland must be out sick, and Spain must have begged not to be cut.  Moody's must be in a panic to get fresh downgrades out now too.

Rockfish's picture

Whats happening in Ireland?

A Man without Qualities's picture

Nothing that can be put off until tomorrow.

A Man without Qualities's picture

LISBON—The Bank of Portugal on Tuesday cut its economic growth forecasts for this year and next and said substantial measures will be needed to meet the government's deficit-reduction goals.

In its Spring Economic Bulletin, the central bank said it now expects gross domestic product to contract this year by 1.4%, more than the 1.3% contraction it forecast in its Winter Bulletin. It also cut its GDP growth forecast for 2012 to 0.3% from 0.6% previously, partly because of the effects of the government's deficit-cutting measures.


FunkyMonkeyBoy's picture

The Bernank has sent out the order on behalf of his masters:

"Europe must fall first. We need more time to loot the U.S."

Josh Randall's picture

Mad Max has a great point that a low Euro helps German exports


However Merkel getting kicked in the cat during these elections could mean the total end is near if the German people aren't willing to float this thing along too much further

TwoShortPlanks's picture

That woman could not get any more attractive.

Dr. Engali's picture

I agree. The Euro will collapse first as we get a strong dollar rally to shake out the weak shorts then we will see the mother of all fiat collapses.

firstdivision's picture

So at this pace we should see CCC in about 2 to 3 years then?

jkruffin's picture

Bubble Bubble Ben's in TROUBLE..................

Republican Lackey's picture

More inflationary news. Defaults flood the market with dollars!

oogs66's picture

looks like Ireland 10 year should hit 10% yield and portugal could cross 8% soon.  Not as exciting as the DOW 12,000 'round' number everyone loves to talk about, but can't be good.  Curves are all inverted and if anything seems the inversion is getting worse, at least in Greece.


TwoShortPlanks's picture

Yeah, Bonds Yields hit 10%, Interest Rates are set at 1%, and unemployment is skyhigh...how the fuck is that part of any sensible recovery???

The whole system is set to trip-up.

Racer's picture

It will stay investment grade until 5 minutes after it collapses to worthless

oogs66's picture

the BBB- for portugal is just a cruel trick. It will give dumb banks the hope its still 'money good' and probably let them fund positions cheaply at ECB, to ensure that when it finally goes, only dumb banks will own them.  Thus forcing governments to bail them out!  Hmmm...maybe not so dumb? 

TradingJoe's picture

Nothing "Blinks" anymore, as long as Benjie keeps printing! What a Tragedy we all have to witness! The world is hinging upon some old greedy seniles!

tallen's picture

I wish S+P set my exams for university. It would literally be impossible to not get a 1st.

Hannibal's picture

All socially constructed abstract numbers and digits on a computer screen, i.e. abstract fluff. It all doesn't matter.

rufusbird's picture

I suspect that the time spent to determining the ratings was more on the telephone than the spreadsheets...

scratch_and_sniff's picture

Yeah, sov downgrades already priced in.(they did it when i wasn't looking)

Widowmaker's picture

More fabricated bullshit from the ratings fraud cartel.

On a scale between 0 and infinity S&P gets a -14 which is above expectations in the land were below average is an asymptropic anomoly marked to make believe until premiums are paid.

Save us, Falcore, fraud-bonuses depend on it!


treemagnet's picture

S&P would probably rate a loan to my sister "investment grade"

Widowmaker's picture

Depends on how much your sister puts out and how much Diet Coke is in her fridge.

"Investment grade is fraud bought and paid."

sbenard's picture

News is irrelevant. Freedom is even irrelevant. We have printed prosperity now!

I wonder what is going to happen when news hits the market that can not be dismissed, on a day when everyone wants to sell and there are no buyers. Are we all counting on "the greater fool" to bail us out? Could get interesting!

midnight's picture

Financial terrorism

Papasmurf's picture

No need to be concerned.  All you do is package a bunch of these puppies into a government fiat bond fund with one dollar worth of US Treasury inside.  Then it can bear the rating of US treasury bonds.  That should help for a month or two.