The United States ratings agency Moody’s, which has already rated the Portuguese state at ´junk’ status, downgraded nine of its banks over fears that they are overexposed to Portuguese bonds.
The move occurred at the same time that the agency also downgraded 12 British financial institutions including Lloyd’s, the Royal Bank of Scotland, Santander UK and the Co-op Bank.
The Portuguese banks affected included Caixa Geral de Depósitos (from Ba1 to Ba2), Banco Santander Totta (Baa3 to Baa2), Montepio Geral (Ba2 to Ba3), BCP (Ba1 to Ba3), BES (Ba1 to Ba2) and BPI (Baa3 to Ba2).
The drop in ratings, which reflects the quality of Portuguese bank credit, has placed the overall health of the banking sector at ‘junk’ status.
At the same time, rival ratings agency Fitch decided, for the time being, to maintain Portugal’s debt rating at BBB – one level above ‘junk’ status.
However, it stated that its overall outlook for Portugal remained negative and could not rule out a further rating cut for the Portuguese state in the future.
Over the weekend, Fitch also downgraded the fortunes of both Italian and Spanish debt, cutting Italy’s credit rating from AA- to A+ and Spain’s from AA+ to AA-.
The move was justified on the grounds that both countries are particularly vulnerable to a worsening of the European sovereign debt crisis.
The cuts were made despite positive statements last week by the German Chancellor, Angela Merkel, who praised Portugal’s efforts to bring its debt levels under control, curb public finances and institute sweeping reforms at all State levels.
Portugal has promised to embark on a radical privatisation programme which includes selling off national carrier TAP to either the Brazilians or Lufthansa/British Airways, privatising the airports authority company ANA and at least one channel from the State-run broadcaster RTP.
At the same time, the country is also undergoing the most radical shakeup to its local government machinery since 1974, scrapping many smaller municipal councils and amalgamating others in a bid to cut costs and bureaucracy.
The Government has also announced controversial reforms to state-run public transport companies such as the railway firm CP (Comboios de Portugal), Carris (a bus company), both Porto and Lisbon Metros, Transtejo and Soflusa (both ferry companies).
These sweeping changes include 5,000 redundancies, reformulated government contracts, an overhaul of their administrations and reduction in senior management staff.
At the same time it was also announced that plans, in any form other than a possible freight line, for the high-speed rail link (TGV) between Madrid and Lisbon and Lisbon and Porto have been shelved indefinitely.
