S&P Warns May Downgrade Portugal Again As Early As This Week

Tyler Durden's picture

Just released by Moody's:

  • On March 23, 2011, the Portuguese parliament rejected the government's proposed austerity package. Prime Minister José Sócrates subsequently resigned, which, in our opinion, increases policy uncertainty and heightens Portugal's refinancing risk.
  • We have lowered our long-term sovereign credit rating on Portugal by two notches to 'BBB' from 'A-'. The 'A-2' short-term sovereign credit rating is unchanged. All ratings remain on CreditWatch with negative implications, pending the official announcement about the European Stability Mechanism.
  • We are lowering our long- and short-term counterparty credit ratings on the five Portuguese banks and two related subsidiaries that we rate. The long-term ratings remain on CreditWatch with negative implications.

  • The negative CreditWatch implications reflect the possibility of a further sovereign downgrade, which we expect could take place as early as this week, and its direct and/or indirect impact on our view of Portuguese banks' creditworthiness.

More bad news for Portuguese bonds which just traded at lifetime high yields.

Full report:

Rating Action

On March 28, 2011, Standard & Poor's Ratings Services lowered its long- and short-term ratings on the five Portuguese banks and two related subsidiaries that it rates. At the same time, Standard & Poor's removed all of its short-term ratings on the banks (except for Millennium bcp) from CreditWatch, where they had been placed with negative implications on Dec. 3, 2010. All long-term ratings that were on CreditWatch with negative implications remain on CreditWatch.

Specifically, we lowered our long- and short-term counterparty ratings on:

  • Banco Santander Totta, S.A. (Santander Totta) to 'BBB/A-3' from 'A/A-1'. At the same time, we lowered our ratings on Santander Totta's hybrid instruments to 'BB' from 'BBB'. In addition, we lowered our assessment of Santander Totta's stand-alone credit profile (SACP) to 'bbb' from 'a-'.
  • 100% state-owned Caixa Geral de Depósitos S.A. (CGD) to 'BBB/A-3' from 'A-/A-2'. At the same time, we lowered our ratings on CGD's hybrids to 'BB' from 'BBB-'. In addition, we lowered our assessment of CGD's SACP to 'bbb' from 'a-'.
  • Banco Espirito Santo, S.A. (BES) and its core subsidiary Banco Espirito Santo de Investimento, S.A. (BESI) to 'BBB/A-3' from 'A-/A-2'. At the same time, we lowered our ratings on BES' and BESI's hybrids to 'BB' from 'BBB-'.
  • Banco BPI S.A. (BPI) and its core subsidiary Banco Português de Investimento S.A. to 'BBB/A-3' from 'A-/A-2'. At the same time, we lowered our ratings on BPI's hybrid to 'BB' from 'BBB-'.
  • Banco Comercial Português, S.A. (Millennium bcp) to 'BBB-/A-3' from 'BBB+/A-2'. In Millennium bcp's case, both the long- and short-term ratings remain on CreditWatch with negative implications. We have increased the notching differential between our ratings on Millennium bcp's hybrids and our counterparty credit ratings on the bank to four notches from three. Consequently, we have lowered our ratings on Millennium bcp's hybrid to 'B+' from 'BB+'.


Our rating actions today reflect:

  • The direct impact of our two-notch downgrade of the Republic of Portugal (BBB/Watch Neg/A-2) on those Portuguese banks' that we previously rated at the same level or higher than the sovereign, namely Santander Totta, CGD, BES, and BPI; and
  • The deterioration we anticipate of the financial profiles of all of the rated Portuguese banks as a result of what we view as an increasingly difficult economic, financial, and operating environment in Portugal.

We rarely rate financial institutions above the long-term sovereign rating on their home country, since we generally consider it unlikely that these institutions would remain unaffected by developments in their domestic economy. We have decided, with today's rating actions, specifically, to no longer rate Santander Totta higher than the sovereign (previously, our long-term rating on Santander Totta incorporated a one-notch uplift over our assessment of the bank's SACP to reflect the benefit of parent support, and, as a result, its long-term rating was one notch higher than the long-term sovereign rating). Although we believe that having Spanish bank Banco Santander S.A. (AA/Negative/A-1+) as a parent gives Santander Totta greater financial flexibility with respect to its domestic peers, we believe that the parent would have little incentive to provide financial support to Santander Totta if the sovereign were to face meaningful stress. Even if Banco Santander were willing to provide financial assistance to Santander Totta in a stressful scenario, we believe that the magnitude of such support would not be material enough to be reflected in a one-notch differential with the long-term sovereign rating.

The operating environment for Portuguese banks is becoming increasingly challenging, in our opinion. We anticipate that the need to correct fiscal and external imbalances will lead the Portuguese economy back into recession in 2011 and will potentially confine economic growth prospects over a more prolonged period. With the economy contracting, Portuguese banks' domestic asset quality and profitability will, in our view, likely deteriorate further. The sound performance we foresee for most of these banks' international operations should, we believe, help partially offset the impact on consolidated profits, but only to a limited extent.

Increasing policy uncertainty, in turn, will, in our opinion, further undermine the already very weak level of investor confidence, increasing Portuguese banks' funding difficulties. In our view, the wholesale markets will remain closed for the issuance of medium and long-term debt, and temporary strains in the short-term markets cannot be disregarded. Potential risks related to episodes of illiquidity in the short-term markets are, in our opinion, mitigated, however, by our view that Portuguese authorities—in the EU
framework—are supportive of the country's financial system, and that, consequently, Portuguese banks benefit from operating in a regulated and supervised environment, with access to extraordinary liquidity, such as that provided by the European Central Bank (ECB).

To cope with challenging funding markets, Portuguese banks have already articulated strategies to deleverage, including selling and/or not renewing domestic and international loans, reducing the size of their securities portfolios, upstreaming excess funding from international operations to parents, and increasing on-balance-sheet retail deposits. We believe that these strategies, while positive from a funding and liquidity perspective, will likely lead to a credit contraction and will heighten price competition for domestic retail funding. In our opinion, credit contraction, in turn, will put pressure on domestic demand and borrowers' ability to meet their financial obligations. As a result, we believe that funding challenges will magnify the negative effect of Portugal's economic recession on Portuguese banks' domestic asset quality and profitability.

In our view, Portuguese banks' direct exposure to the country's sovereign debt, through their securities portfolio, is not negligible compared to the banks' capital bases (particularly for some institutions). At current rating levels, however, we do not think that public debt holdings expose Portuguese banks to significant credit risk, although they do expose them to market risk.

Lastly, we anticipate that Portuguese banks' capitalization will remain stable, with the likely reduction of risk-weighted assets (RWA) as the deleveraging progresses compensating the banks' weak earnings generation. We see downside risk, however, if weak market performance increases the banks' pension fund deficits, which are partly deducted from regulatory capital ratios. In any event, and as in the past, we do not expect capital to be a supportive rating factor for the Portuguese banks.

In light of the challenges ahead and our actions today on the Portuguese banks we rate, we will shortly review our Banking Industry Country Risk Assessment (BICRA) for the Portuguese financial system (we currently place Portugal in BICRA Group 3 on our scale of 1 to 10, with 1 representing the strongest).

We have lowered our short-term ratings on the Portuguese banks to 'A-3' in the context of what we see as increased vulnerability of their funding profiles to fragile market confidence. The current operating environment magnifies financial institutions' inherently high exposure to liquidity risks, given their highly leveraged balance sheets and the meaningful weight of short-term liabilities (including deposits) in their funding mixes.

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4xaddict's picture

you can do iiiiiiitt!

Id fight Gandhi's picture

Market yawns.

Should shoot the 10yr to 12 soon.

Hope there's no bailout

Harlequin001's picture

They're a bit late, obviously trying to catch up...

jkruffin's picture

Just default and get it over with Geeeezzzz....wtf?

Anyone who has a clue already knows the PIIGS are going to default.  All they have been doing for the past 2 years is trying to buy time to figure another scam out to keep the game going. Default and get it over with and stop letting the rating agencies look as though they have a clue. They have to get back to their porn..

Ray1968's picture

They can't default. How else can you keep the children and grand-children (and the yet to be born) into the bondage of tax slavery for the benefits of the bankers????????

A Man without Qualities's picture

If they default, it will suddenly expose what lies in the nooks and crannies of the great global extend and pretend game.  The bankers keep saying you can't let defaults happen, it would be just too terrible, but the ordinary people are tiring of the bullshit.  Problem is, they don't realize just how insolvent the whole system is and how much wealth has been stripped out by the financial sector, hidden behind accounting tricks, derivatives and outright deceit.  

In fact, the only way to hide the years of theft is to destroy the currency, thus rendering valuations meaningless.

Sudden Debt's picture

downgrade against who?

The US?

The rest of Europe?



Careless Whisper's picture

well ireland is playing hardball. tells bondholders it's haircut time.


and this kid sez: get your drink on, and your new irish haircut

lucky charms and guiness. i eat this stuff for breakfast, lunch, and dinner. you got a problem with that?



tallen's picture

S&P should just downgrade them to junk along with all the other PIIGS. It's a joke. Just prolong it for ages. I mean who seriously thought portugal was A-. I mean quality standards are really dropping somewhat.


S&P are probably getting massive payouts by the investment banks to keep them at these massively high ratings while they buy all the CDs they can.

Urban Redneck's picture

"Lastly, we anticipate that Portuguese banks' capitalization will remain stable, with the likely reduction of risk-weighted assets (RWA) as the deleveraging progresses compensating the banks' weak earnings generation."


And what happens to the bank's capitalization if LCH Clearnet hikes margin requirements on Portuguese debt???

jkruffin's picture

Isn't it ironic the PIIGS will default in the exact order of their acronym?

web bot's picture

So when the #uck does the US get downgraded? It is impossible for the US to represent 1/3 of the global economy, have its on-book debt obligation approaching 100% of GDP with unfunded liabilities of approx $79 Trillion ($79,000,000,000,000.00), and have Trillion dollar+ deficits for the next 5 to 10 years and still retain a AAA rating.

Factor out the reserve currency story and we wouldn't have a AAA rating... and you think things are not being manipulated? The US is the proverbial drunk uncle at the wedding that everyone is ignoring... until he steps out into the open.


jkruffin's picture

$79 trillion?   Try $113 trillion...

mdwagner's picture

Try $387 zillion...  That means about as much.

Harlequin001's picture

speaks volumes about the rating agencies...

and to think your highly paid bond fund managers relied almost exclusively on them for their CDO DD...

web bot's picture

Depends on your math... but I'll take your number.

boricuadigm-shift's picture

Many negative news in the world for quite some time.  Independent of what happens in this world, we got to resonate on a higuer vibration:


Must read article - Very Interesting... What are you going to do?

2012 as the end of a cosmic cycle


"Two very opposite incidents, one filled with violence that shocked the world and the other with the hope of peace, the end the conflicts and off a better world. The scientists connected to the Heart Math Institute came with a hypothesis and it is: "stronger collective emotion has some measurable impact on the magnetic fields of the ...earth"."
Josephine29's picture

Just in case anybody had forgotten her this is the week of the Irish banking stress tests. Many now seem to be clustering around the thoughts that Notayesmanseconomics has been expressing for quite some time.

I wrote a while back that the Chairman of Anglo-Irish Bank had reported that he felt that the 35 billion Euros set aside in the EU/ECB/IMF rescue plan would not be enough and more would be needed. I still feel that he had no reason to misrepresent the numbers as he was a new appointment and appeared to gain little from exaggeration.



The Euro zone is hotting up again is it not?