After S&P put Portugal on "watch negative" on November 30, citing "little progress on any growth-enhancing reforms to offset the fiscal drag from these scheduled 2011 budgetary cuts" by the government, today Mark Zandi's rating agency, with a 3 week delay, has decided to prove once and for all, that in the ascent to the rarefied intellectual air of the now obsolete business model of the rating agencies, S&P always takes the not too long bus. In what can be classified as a virtually plagiarized report, Moody's says: "Moody's says that an important driver of its decision to review Portugal's ratings is its concerns over the economy's sluggish growth, driven mainly by weak domestic demand. In addition, deflationary pressures as a result of fiscal consolidation and bank deleveraging may put additional downward pressure on nominal GDP growth." There was a time when the EUR would plunge on news like this. Now that nobody really cares about any newsflow (and certainly not about the rating agency's opinion), this is barely sufficient to push the EURUSD down 40 pips.
Moody's Investors Service has today placed Portugal's A1 long term and Prime-1 short-term government bond ratings on review for possible downgrade.
The main triggers for the review include:
(1) Uncertainties about Portugal's longer-term economic vitality, which will be exacerbated by the impact of fiscal austerity;
(2) Concerns about Portugal's ability to access the capital markets at a sustainable price; and
(3) Concerns about the possible impact on the government's debt metrics of further support for the banking sector, which may be needed for the banks to regain access to the private capital markets.
Moody's believes that these concerns warrant placing Portugal's ratings on review for downgrade and says that the rating could be adjusted downwards by a notch or two. "In Moody's opinion, Portugal's solvency is not in question," says Anthony Thomas, Moody's Vice President and lead analyst for Portugal, "but the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy's ability to withstand fiscal consolidation and private sector deleveraging mean its outlook may no longer be consistent with an A1 rating."
RATIONALE FOR REVIEW FOR DOWNGRADE
Moody's says that an important driver of its decision to review Portugal's ratings is its concerns over the economy's sluggish growth, driven mainly by weak domestic demand. In addition, deflationary pressures as a result of fiscal consolidation and bank deleveraging may put additional downward pressure on nominal GDP growth.
The second key driver for the review is the cost that the government might have to pay to fulfill its funding needs for the next several years. "The markets have remained open to the Portuguese government," adds Thomas, "but it is having to pay an elevated price, which if sustained will increase substantially its debt service costs over time." The lack of success in reducing the budget deficit by much this year, excluding one-off measures, has added to Moody's concerns in this regard.
Finally, Moody's sees increasing challenges facing the banking sector that could have a financial impact on the government's balance sheet. These include the banks' reliance on the European Central Bank for funding. It is possible that the government may have to provide further support to the banks to help them regain market confidence and allow them to re-enter the private capital markets. Although the Portuguese banking sector has required very little assistance so far from the government, any such financing needs going forward could adversely affect the government's debt metrics, depending on the circumstances and the amounts required.
FACTORS TO BE CONSIDERED IN THE REVIEW
Moody's review of Portugal's sovereign ratings will focus first on the economy's growth prospects, in particular the likelihood that any structural reforms undertaken in the labor and product markets will boost growth potential. Included in this analysis will be an evaluation of whether recent export dynamism can be sustained sufficiently to offset the dampening of domestic demand coming from fiscal consolidation and private sector deleveraging. In addition to fiscal austerity, at least a moderate pace of nominal GDP growth will be needed to stabilise and eventually reverse the currently adverse debt trajectory.
The rating agency also will be monitoring the government's ongoing funding programme to see if the government remains able to access the capital markets and at what price. Although Moody's believes the authorities are determined to reduce the budget deficit to under 3% of GDP over the medium-term, lower funding costs will be key to limiting the recent deterioration in debt affordability and improving long-term debt sustainability. Regional and local debt market conditions will determine whether the Portuguese government will ultimately decide to move out of the private capital markets and approach the EFSF for funding. If it comes to pass, such a step could in fact positively impact Portugal's credit risk profile by reducing short-term uncertainties and stabilizing the trajectory of the government's funding costs. At the same time, however, the circumstances that might lead Portugal to seek liquidity support from official sources would likely also raise concerns about its medium-term prospects of regaining access to private market funding.
Finally, in conjunction with Moody's Financial Institutions Group, which recently placed most Portuguese banks on review for possible downgrade, the sovereign rating analysis will also assess whether the government may need to provide financing to recapitalise the main banks in the country, and how much might be required under various scenarios.
Separately, Moody's is publishing a Special Comment explaining its approach to rating European sovereigns after today's rating action on Portugal as well as last week's rating actions on Ireland, Greece and Spain. The report entitled "Sovereign Credit Risk in Eurozone Countries Under Stress" will shortly be available on www.moodys.com.
PREVIOUS RATING ACTION AND METHODOLOGY
Moody's last rating action affecting Portugal was implemented on 13 July 2010, when the rating agency downgraded Portugal's Aa2 to A1 with a stable outlook. The rating action prior to that was taken on 5 May 2010, when the rating agency placed Portugal's Aa2 ratings on review for possible downgrade.
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. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.