Portugal's Ratings Lowered To 'BB/B'; Recovery Rating Of 4 Assigned; Outlook Negative
|Publication date: 13-Jan-2012 16:45:59 EST|
- We are lowering our long- and short-term sovereign credit ratings on Portugal to 'BB/B' from 'BBB-/A-3'.
- The downgrade reflects what we view as the negative impact of deepening political, financial, and monetary problems within the European Economic and Monetary Union (eurozone) on Portugal's already challenging readjustment path and its elevated vulnerabilities to external financing risks.
- We are assigning a recovery rating of '4' to Portugal, which reflects our assessment of "average" (30%-50%) recovery in the event of a sovereign default.
- The outlook on the long-term rating is negative.
FRANKFURT (Standard & Poor's) Jan. 13, 2012--Standard & Poor's Ratings Services said today that it lowered its long-term sovereign credit rating on the Republic of Portugal by two notches to 'BB' from 'BBB-', and its short-term rating to 'B' from 'A-3'. The outlook on the long-term rating is negative. Our transfer and convertibility (T&C) assessment for Portugal, as for all eurozone members, is 'AAA', reflecting Standard & Poor's view that the likelihood of the European Central Bank restricting nonsovereign access to foreign currency needed for debt service is extremely low. This reflects the full and open access to foreign currency that holders of euro currently enjoy and which we expect to remain the case in the foreseeable future. At the same time, we assigned a recovery rating of '4' to Portugal's debt issues, indicating our expectation of "average" (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default. The downgrade reflects our opinion of the impact of deepening political, financial, and monetary problems within the eurozone, with which Portugal is closely integrated. It also reflects our view of sustained external financing pressures on Portugal's private sector, and what these may imply for growth performance and, in turn, public finances. The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures. We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery". As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues. Accordingly, in line with our published sovereign criteria, we have adjusted downward the political score we assign to Portugal (see "Sovereign Government Rating Methodology And Assumptions," published on June 30, 2011). This is a reflection of our view that the effectiveness, stability, and predictability of European policymaking and political institutions (with which Portugal is closely integrated) have not been as strong as we believe are called for by the severity of a broadening and deepening financial crisis in the eurozone. For Portugal, we believe this weakened policy environment could complicate domestic political support for the implementation of the EU/IMF program, put the government's fiscal consolidation strategy at risk, and trigger further increases in Portugal's already high net general government debt stock, which is expected to end 2012 at 106% of GDP. In our view, the debt restructuring process in Greece could further alienate potential investors in Portuguese government debt and reduce the likelihood that Portugal might be able to return to capital markets some time in 2013. We have also lowered Portugal's external score according to our criteria, to reflect our view of the impact on Portugal of what we consider to be rapid deterioration in the European financial markets. We believe there are significant risks to Portugal's external financing over the next two years as creditors of its private sector, primarily other eurozone banks, are likely to reduce their exposures to Portugal more rapidly than previously anticipated, partly due to uncertainties on the EU's future crisis management policies. We believe that the proposed sale by Portuguese banks of external assets--given the deteriorating financial environment in Europe--is unlikely to generate financial inflows as planned. We think this will likely force the banks to deleverage more rapidly, and with a greater focus on domestic assets, than we had previously expected. Portugal's ratings are also constrained by what we view as the country's very high public sector debt and weak economic growth potential. The ratings are supported by our view of the currently strong commitment to fiscal consolidation and extensive program of structural reform under the EU/IMF program. Together with the lowering of our ratings on Portugal to 'BB/B', we have also assigned a recovery rating of '4' to Portugal's debt. This is in keeping with our policy to provide our estimates of likely recovery of principal in the event of debt restructuring or a debt default for issuers with a speculative-grade rating. A recovery rating of '4' reflects our current expectation of "average" (30%-50%) recovery for holders of Portuguese government debt. The outlook on the long-term rating on Portugal is negative, indicating that we believe there is at least a one-in-three chance that we could lower the ratings again in the next 12 months. In our view, a more severe economic contraction could result in a worsening political environment in Portugal and further negative adjustment in our political score, according to our criteria. In particular, continued fiscal austerity without improving growth prospects could result in widespread unemployment, which could negatively affect social cohesion and political support for the EU/IMF program. We could also lower the ratings if we come to the view that the potential cost of recapitalizing Portuguese banks is likely to increase the government debt burden substantially. Conversely, the ratings could stabilize at the current level if Portugal achieves full compliance with the EU/IMF official lending program, in particular, fully implementing structural reforms and lifting growth prospects; or successful sales of assets in the public and private sectors generate substantial inflows of funds to mitigate external liquidity constraints. RELATED CRITERIA AND RESEARCH All articles listed below are available on RatingsDirect on the Global Credit Portal.
- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
- Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
- Introduction Of Sovereign Recovery Ratings, June 14, 2007
- Standard & Poor's Puts Ratings On Eurozone Sovereigns On CreditWatch With Negative Implications, Dec. 5, 2011
- Trade Imbalances In The Eurozone Distort Growth For Both Creditors And Debtors, Says Report, Dec. 1, 2011
- Who Will Solve The Debt Crisis?, Nov. 10, 2011
- Standard & Poor's RPM Measures The Eurozone's Great Rebalancing Act, Nov. 21, 2011
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|Primary Credit Analysts:||Moritz Kraemer, Frankfurt (49) 69-33-99-9249;|
|Frank Gill, London (44) 20-7176-7129;|
|Additional Contact:||Sovereign Ratings;|
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