Ratings agency warns Portugal

Portugal and Greece have joined Ireland and Iceland as the new sick men of Europe as ratings agency Moody’s has downgraded their creditworthiness on the international markets.

The ratings agency has warned both countries that unless they make drastic public sector finance reforms and cuts, the euro may not eventually be in a position to protect them.

Moody’s downgraded Portugal from its Aa2 stable status to negative which means that interests rates on government loans or sovereign debt will be higher.

The agency has blamed “haemorrhaging public finances” and has added that both Greece and Portugal have “serious fiscal challenges”.

The news couldn’t come at a worse time for Prime Minister José Sócrates’ PS socialist government, which is finding it increasingly difficult to govern with consensus from opposition political factions in parliament on both the far left and far right.

The government has yet to give indications on what it will do in the budget next year in terms of the measures that it will take to bring the government deficit back down within the three per cent limit stipulated by the European Union’s Growth & Stability Pact.

Finance Minister Fernando Teixeira dos Santos, who has until January to present his government’s detailed budgetary strategy because of the elections last autumn, said last week that the government remains committed to economic reform and that its rising debt load is the result of the global economic downturn.

Portugal’s total public debt, including that of public sector companies has risen to 182.6 billion euros (up 28 billion euros on 2008) while the government’s debt not including public sector companies, has soared to 85.9 per cent of the country’s GDP from 70.7 per cent last year and is expected to reach 90 per cent by 2010.

Portugal’s liquid external debt is even worse. The money the State and its private and public companies owe to other countries and outside financial entities has soared from around 80 billion euros in 2003 (60 per cent of GDP) to more than 325 billion euros by 2009 (200 per cent of GDP).

The news of Portugal’s downgrading impacted Portuguese yield spreads (an indication of loan risk premiums) which shot up by two base points from 0.54 to 0.56. That means that it will cost Portugal more to service her debts in interest rates.  

Other ratings agencies have already downgraded Portugal with Standard & Poors reducing her A+ rating to A-1 (Outlook Negative) in September and Fitch also revising ratings downwards.

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