March 29, 2011

Portugal Gets Mixed News: Ratings Cut, Threat; Victory in Court Appeal

S&P may drop ratings again; EU fine challenge successful

Portugal got bad news on Monday and good news on Tuesday, although the former may outweigh the latter. Standard & Poor’s said that it might downgrade the country’s rating again, after last week’s slice of two notches from the grade—this after it cut long- and short-term counterparty credit ratings for five Portuguese banks and two related subsidiaries.

The good news? The European Union (EU) General Court ruled in the nation’s favor against an EU-imposed fine of more than 3.6 million euros ($5.1 million) levied against Lisbon for failure to bring the country’s public procurement laws into compliance with an EU rule to meet a deadline.

Bloomberg News reported S&P’s consideration of yet another sovereign ratings cut, which it said came in an e-mailed statement: “The negative CreditWatch implications on our long-term counterparty credit ratings on the Portuguese banks reflect our negative CreditWatch listing of the sovereign rating, and thus the possibility of a further sovereign downgrade” may occur “as early as this week.”

The news came after Banco Santander Totta SA; state-owned Caixa Geral de Depositos SA; Banco Espirito Santo SA (BES); Banco BPI SA (BPI); and Banco Comercial Portugues SA (BCP)all saw hits to their counterparty credit ratings.

The small bright spot was the decision by the EU General Court. Portugal had challenged a European Commission (EC) determination in 2008 that the country had failed to comply with a court ruling ordering it to pay 19,392 euros for every day it delayed its compliance with the EU law regarding public procurement, and that the period of noncompliance ran from Jan. 10, 2008, until July 18, 2008. Portugal asserted that its law was in compliance as of Jan. 30, 2008, and that it should only be held liable for 20 days of fines.

The Luxembourg-based EU General Court found that the EC “was not entitled to decide” that Portugal had not complied with earlier rulings and “then draw conclusions from this for the calculation of the penalty payment.”

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