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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 

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 

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 

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 

All articles listed below are available on RatingsDirect on the Global Credit 
Standard & Poor's will hold a teleconference on Saturday Jan. 14, 2012 at 3:00 
PM U.K. time. The teleconference can be accessed live or via replay and by 
phone or audio internet streaming

The call will begin promptly at 3:00 p.m. 

Passcode: 2705831 
For security reasons, the passcode will be required to join the call. 

Country        Toll Numbers            Freephone/Toll Free Number
AUSTRIA        43-1-92-80-003          0800-677-861 
BELGIUM        32-1-150-0312           0800-4-9471 
DENMARK        45-7014-0239            8088-2100 
ESTONIA                                800-011-1121       
FINLAND        106-33-149              0800-1-12771 
FRANCE         33-1-70-75-25-35        080-563-9909 
GERMANY        49-69-2222-3198         0800-101-6627 
GREECE         30-80-1-100-0674        00800-12-6609 
IRELAND        353-1-247-5274          1800-992-870 
ITALY          39-02-3601-0953         800-985-849 
LUXEMBOURG     352-27-000-1351         8002-9058 
NETHERLANDS    31-20-718-8530          0800-023-4392 
PORTUGAL                               8008-12439 
SLOVAK REPUBLIC 421-2-322-422-16           
SPAIN          34-91-414-40-78         800-098-194 
UNITED KINGDOM 44-20-7950-6551         0800-279-3590 
USA            1-210-795-1143          866-297-1588 

Call notes: This call is to be recorded for Instant Replay purposes
UK TOLL #: +44-20-7108-6279
UK TOLL FREE #: 0800-376-9027

The instant replay will start at: Jan. 14, 2012 5:30pm UKT
The instant replay will end at: Feb-14-2012 11:59pm UKT

Passcode for replay: 7498
Restrictions may exist when accessing freephone/toll free numbers using a 
mobile telephone. 

To join the event:
Conference number: 1297498
Passcode: 2705831 

To access the Audio Replay of this call, all parties can:
1. Go to the URL listed above.
2. Choose Audio Streaming under Join Events.
3. Enter the conference number and passcode. (Note that if this is a recurring 
event, multiple dates may be listed.)
Replays are available for 30 days after the live event. 

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
column.  Alternatively, call one of the following Standard & Poor's numbers: 
Client Support Europe (44) 20-7176-7176; London Press Office (44) 
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm 
(46) 8-440-5914; or Moscow 7 (495) 783-4009.
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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