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Moody's Cuts Portugal To Junk!


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Also, the CNBC story has this wrong...the rating cut was to Ba2, not Baa2.


The following is the full text of the Moody’s statement:


Moody’s Investors Service has today downgraded Portugal’s long-term

government bond ratings to Ba2 from Baa1 and assigned a negative

outlook. Concurrently, Moody’s has also downgraded the government’s

short-term debt rating to (P) Not-Prime from (P) Prime-2. Today’s rating

action concludes the review of Portugal’s ratings initiated on 5 April



The following drivers prompted Moody’s decision to downgrade and

assign a negative outlook:


1. The growing risk that Portugal will require a second round of

official financing before it can return to the private market, and the

increasing possibility that private sector creditor participation will

be required as a pre-condition.


2. Heightened concerns that Portugal will not be able to fully

achieve the deficit reduction and debt stabilisation targets set out in

its loan agreement with the European Union (EU) and International

Monetary Fund (IMF) due to the formidable challenges the country is

facing in reducing spending, increasing tax compliance, achieving

economic growth and supporting the banking system.




The first driver informing today’s downgrade of Portugal’s

sovereign rating is the increasing probability that Portugal will not be

able to borrow at sustainable rates in the capital markets in the second

half of 2013 and for some time thereafter. Such a scenario would

necessitate further rounds of official financing, and this may require

the participation of existing investors in proportion to the size of

their holdings of debt that will become due.


Moody’s notes that European policymakers have grown increasingly

concerned about the shifting of Greek debt held by private investors

onto the balance sheets of the official sector. Should a Greek

restructuring become necessary at some future date, a shift from private

to public financing would imply that an increasingly large share of the

cost would need to be borne by public sector creditors. To offset this

risk, some policymakers have proposed that private sector participation

should be a precondition for additional rounds of official lending to



Although Portugal’s Ba2 rating indicates a much lower risk of

restructuring than Greece’s Caa1 rating, the EU’s evolving approach to

providing official support is an important factor for Portugal because

it implies a rising risk that private sector participation could become

a precondition for additional rounds of official lending to Portugal in

the future as well. This development is significant not only because it

increases the economic risks facing current investors, but also because

it may discourage new private sector lending going forward and reduce

the likelihood that Portugal will soon be able to regain market access

on sustainable terms.


The second driver of today’s rating action is Moody’s concern that

Portugal will not achieve the deficit reduction target — to 3% by 2013

from 9.1% last year as projected in the EU-IMF programme — due to the

formidable challenges the country is facing in reducing spending,

increasing tax compliance, achieving economic growth and supporting the

banking system. As a result, the country may be unable to stabilise its

debt/GDP ratio by 2013. Specifically, Moody’s is concerned about the

following sources of risk to the budget deficit projections:


1) The government’s plans to restrain its spending may prove

difficult to implement in full in sectors such as healthcare,

state-owned enterprises and regional and local governments.


2) The government’s plans to improve tax compliance (and, hence,

generate the projected additional revenues) within the timeframe of the

loan programme and, in combination with the factor above, may hinder the

authorities’ ability to reduce the budget deficit as targeted.


3) Economic growth may turn out to be weaker than expected, which

would compromise the government’s deficit reduction targets. Moreover,

the anticipated fiscal consolidation and bank deleveraging would further

exacerbate this. Consensus growth forecasts for the country have been

revised downwards following the EU/IMF loan agreement. Even after these

downward revisions, Moody’s believes the risks to economic growth remain

skewed to the downside.


4) There is a non-negligible possibility that Portugal’s banking

sector will require support beyond what is currently envisaged in the

EU/IMF loan agreement. Any capital infusion into the banking system from

the government would add additional debt to its balance sheet.


Moody’s acknowledges that its earlier concerns about political

uncertainty within Portugal itself have been largely resolved.

Portugal’s national elections on 5 June led to the formation of a viable

government, both components of which had campaigned on the basis of

supporting the EU-IMF loan agreement negotiated by the previous

government. Moody’s also acknowledges the policy initiatives announced

at the end of June demonstrate the new Portuguese government’s

commitment to the programme. However, the downside risks (as detailed

above) are such that Moody’s now considers the government long-term bond

rating to be more appropriately positioned at Ba2. The negative outlook

reflects the implementation risks associated with the government’s

ambitious plans.




Developments that could stabilise the outlook or lead to an upgrade

would be a reduction in the likelihood that private sector participation

might be required as precondition for future rounds of official support

or evidence that Portugal is likely to achieve or exceed its deficit

reduction targets.


A further downgrade could be triggered by a significant slippage in

the execution of the government’s fiscal consolidation programme, a

further downward revision of the country’s economic growth prospects or

an increased risk that further support requires private sector




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