S&P Places Portugal On Watch Negative, May Cut A- Rating

This is getting ridonculous: "On Nov. 30, 2010, Standard & Poor's Ratings Services placed its 'A-' long-term and 'A-2' short-term foreign and local currency sovereign credit ratings on the Republic of Portugal on CreditWatch with negative implications. The transfer and convertibility assessment remains 'AAA'." The only that matters: what does Dagong say. Our clown rating agencies are way overdue for retirement watch imminent. If the market is totally retarded, we guess the EURUSD may be whacked on this news.

Portugal 'A-/A-2' Ratings Placed On Watch Negative On Uncertainty Regarding The Effects Of The Proposed EU Treaty Change

Overview

    * Standard & Poor's is assessing the proposed EU treaty changes regarding the seniority of private-sector creditors.
    * We are placing our 'A-' long-term and 'A-2' short-term ratings on Portugal on CreditWatch with negative implications.

Rating Action

On Nov. 30, 2010, Standard & Poor's Ratings Services placed its 'A-' long-term and 'A-2' short-term foreign and local currency sovereign credit ratings on the Republic of Portugal on CreditWatch with negative implications. The transfer and convertibility assessment remains 'AAA'. 

Rationale

The CreditWatch placement reflects our view of increased risks to the government's creditworthiness. These risks stem from uncertainty about the government's possible recourse to official funding and the consequences that obtaining such funding could have for the position of private-sector creditors vis-à-vis official creditors after 2013.

In 2011, Portugal's minority government is set to implement an ambitious fiscal austerity program with an emphasis on reducing expenditures. However, we see the government as having made little progress on any growth-enhancing reforms to offset the fiscal drag from these scheduled 2011 budgetary cuts. In particular, we believe that policies the government has pursued have done little to boost labor flexibility and productivity. As a consequence of the Portuguese economy's structural rigidities and the volatile external conditions, we project that the economy will contract by at least 2% in 2011 in real terms. The downward revision to our growth projection also reflects the fact that Portugal has not reduced its large external current account deficit during 2010.

In addition to what we view as the economy's weak growth prospects, the large stock of Portuguese debt that non-residents hold (54% of GDP) has increased the government's vulnerability to rising real interest rates. This contributes to the country's large gross external financing needs and, we believe, raises the likelihood that Portugal will seek external assistance from the EU. 

What Portugal does to combat downward pressures on growth and under what terms it accepts external support--if it does at all--will influence the government's creditworthiness. The Eurogroup Ministers recently proposed treaty changes to establish a permanent crisis mechanism to be called the European Stability Mechanism (ESM), which will be based on the European Financial Stability Facility. It is our understanding that the ESM may be designed to rank ahead of private creditors in any future debt restructurings beginning in 2013. As a result, debt that European Monetary Union member states issue might not rank pari passu with debt that the ESM issues. We think that this treaty change would represent a move away from the original design of the European Financial Stability Facility, which was intentionally exempt from preferred creditor status by the 16 members of the Euro Area in an effort to assist European Monetary Union members in financial difficulties.
 
CreditWatch

We expect to resolve the CreditWatch within the next three months. If Portugal does seek an external support program and if we believe private creditors will be subordinated to public creditors, or if Portugal's fiscal or growth prospects weaken further, we could lower the long- and short-term ratings.

Even if we were to downgrade Portugal, we would currently expect the ratings to remain in the investment-grade category. If Portugal does not seek an external support program because of better-than-anticipated fiscal performance or the passage of growth-enhancing reforms, we would view the likelihood of it needing external official support as reduced. As a result, we could affirm the ratings at 'A-/A-2'.