Portugal could face downgrade, Moody's warns

Portugal could face downgrade, Moody's warns
5 May 2010, by William L. Watts (MarketWatch)
http://www.marketwatch.com/story/moodys-warns-portugal-could-face-downgrade-2010-05-05

LONDON (MarketWatch) -- Ratings agency Moody's Investors Service on Wednesday placed Portugal's government bond ratings on review for possible downgrade, citing the recent deterioration of the country's public finances and "long-term growth challenges" to the economy.

In the event of a downgrade, the country's Aa2 ratings would fall by one or, at most, two notches, the agency said. Moody's said it expects to complete the review within three months.

The move comes as Portugal's bond market feels renewed pressure amid rising sovereign debt fears despite the provision of a 110 billion euro ($143.7 billion) bailout package for Greece provided by fellow euro-zone countries and the International Monetary Fund.

Moody's senior analyst Anthony Thomas said the decision to place Portugal on review reflected "the potentially lasting deterioration in the government's debt metrics," which "in the context of a small and slow-growing economy ... may no longer be consistent with a Aa2 rating."
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Moody's said it "believes that increased risk discrimination in the financial markets may raise Portugal's financing costs for some time to come."

But the agency said it expected Portugal's debt service costs to remain "very affordable" in the near to medium term. Although the country's debt metrics may turn out to be more consistent with a low Aa or high A rating, government debt "is neither unsustainable nor unbearable."

Portugal on Wednesday sold 500 million euros ($646.1 million) of six-month T-bills at an average yield of 2.955% and producing a bid-to-cover ratio of 1.9 to 1. The yield was well above previous auctions of 3- and 12-month bills in April, which produced average yields of 0.476% and 1.079% respectively, said economists at UniCredit. Still, the auction went smoothly, particularly given the "much riskier environment" for the euro-zone periphery, they said.

Moody's noted that Portugal's growth challenges and large fiscal deficits have led to comparisons with Greece, but emphasized that Greece faces "far more serous fiscal difficulties than Portugal."

Still, Moody's said Portugal faces an extended period of retrenchment until the country's domestic financial imbalances are corrected.

The PSI 20 stock market index dropped 2.3% to 9,628.40 in Lisbon, with Cimpor fell 4.8% and Portugal Telecom fell 3.7%.

Portugal could face downgrade, Moody's warns 5 May 2010 (MarketWatch) http://tinyurl.com/34z3ofd