March 25, 2011

Portugal Suffers Ratings Cuts, but Not Expected to Seek Bailout

Fitch, S&P punish Lisbon for government's fall; no rescue on the horizon

The same day that Portugal Prime Minister Jose Socrates resigned his position, Fitch Ratings on Thursday cut the nation’s credit rating by two notches, saying that the country’s financing is at risk. That was followed on Friday by a two-notch ratings cut from Standard & Poor’s, which threatened another cut as early as next week.

Amid all the turmoil, Eurogroup President Jean-Claude Junker said that he does not expect Lisbon to seek a bailout from the European Union’s (EU)rescue fund any time soon.

Fitch took action in the wake of the failure of parliament to pass new austerity measures and the subsequent resignation of Socrates, Reuters reported. The credit rating agency warned that additional downgrades may follow over the next three to six months, particularly if a “timely and credible” financial rescue package from the EU and the International Monetary Fund (IMF) does not materialize.

Fitch analyst Douglas Renwick said in a statement: "Given the lack of improvement in financing conditions, Fitch no longer assumes Portugal can maintain affordable market access this year under its baseline scenario."

The Fitch downgrade drops long-term foreign- and local-currency issuer ratings to A- from A+. Short-term issuer ratings fell from F1 to F2, with all new notes classified as “rating watch negative.” The country ceiling remains at AAA. This puts Fitch’s ratings on par with Moody’s, which took its own action last week when it dropped the country two notches to an A3 rating, equal to Fitch’s A-.

S&P’s actions were caused by increased political uncertainty, the agency said as it dropped Portugal to a BBB rating. The outcome of the euro zone summit meeting will most likely determine any additional downgrades; the company issued a statement that said in part, "Based on current information and expectations, we could lower the ratings on Portugal again by one notch once the details of the ESM [European Stability Mechanism] are officially announced. Such a rating action could take place as early as next week."

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said in the report of Fitch’s move, "They are only catching up with other rating agencies, and with all ratings still being investment grade I don't think there'll be much impact in the bond market." He went on to add, "But the timing looks strange and their focus on the political issues seems a bit of an exaggeration and premature. The key context is the European summit, which apparently is dominated by the Portuguese crisis, so they at least could have waited for the summit to end."

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