China was once reported to be ready to purchase a substantial amount of sovereign debt from Portugal, but may now be rethinking that option, as its domestic credit rating agency, Dagong Global Credit Rating, cut Lisbon’s sovereign rating on Wednesday.
Reuters reported that Dagong dropped Portugal’s rating by a notch to BBB+, which is lower than that given the country by international ratings agencies such as Standard & Poor’s and Fitch Ratings. In a statement, the agency said that Portugal’s economy might shrink during 2011 and that the sovereign debt crisis in Europe could be headed for rougher times this year.
Questionable success in creating financial reform and economic growth that was slow at best were two major factors in the agency’s determination. "It will be more difficult than expected for Portugal to make structural reforms and to improve its current account deficits," the statement said in part. "The country will also see bigger pressure on liquidity and asset quality in its banking system.”
While Dagong is independent of the Chinese government and does not necessarily present Beijing’s views in its ratings, it did garner some press in 2010 when it ranked the U.S. at AA, a step lower than it did China at AA+. The ratings agency has been rating corporate bonds since 1994.
It remains to be seen whether, as previously reported by AdvisorOne.com, China still stands ready to purchase 4-5 billion euros ($5.571-$6.964 billion) in Portuguese debt so that Lisbon does not fare so badly in the bond markets. The possibility, which was written about in December in the business daily Journal de Negocios, was not confirmed at the time by China, nor did the Portuguese government comment on it. Whether such an action will occur following the ratings change is still in the wind.