Portugal in ratings agency downgrade threat

Portugal is facing a fresh credit rating downgrade, this time from Moody’s which fears the Government’s current austerity package will damage growth.

The United States ratings agency, which has put Portugal ‘under review’, says it is concerned about the country’s long-term vitality.

The decision was also influenced by interest rates for Portuguese 10-year sovereign bonds once again edging towards the seven per cent barrier, closing on Tuesday at 6.46%.

Investors are also worried about the state of the nation’s banks, particularly Millennium bcp and BPN, which could expect a €500 million Government injection to ease liquidity worries.

Moody’s also predicts that Portugal will struggle to borrow from the financial markets, which could mean that it will be forced to seek rescue package from the IMF and EU.

At the present time Portuguese sovereign debts are rated by Moody’s as A1, which is its fifth highest rating, six notches above junk status.

Moody’s top analyst for Portugal, Anthony Thomas, told the media on Monday that solvency was not Portugal’s main issue, rather its ability to borrow money on the international markets at an affordable rate which would drive up the cost of servicing its borrowing and debt.

However, on Tuesday, investors rushed to downplay the rating cut threat with stock markets around Europe rising and concerns focused more on the European Central Bank and Germany.

“Threats of ratings cuts certainly don’t help matters at the present time but the effect is limited and the markets are more concerned on what is happening elsewhere in Europe,” Luca Jellinek, a bonds specialist for Crédit Agricole told the business daily newspaper Negócios on Tuesday.

The Portuguese Government states that it is on target for bringing down its 9.4% GDP deficit down to 7.3% by the end of the year and 4.6 per cent by the end of 2011.

by Chris Graeme