London, 05 May 2010 -- Moody's Investors Service has today placed Portugal's Aa2 government bond ratings on review for possible downgrade, while the government's Prime-1 short-term rating was affirmed. Moody's expects that, in the event of a downgrade, Portugal's Aa2 ratings would fall by one, or at most two, notches. The review of Portugal's ratings -- which had been on negative outlook since October 2009 -- is expected to conclude within a three-month time horizon.
Today's rating action reflects the recent deterioration of Portugal's public finances as well as the economy's long-term growth challenges. "The review for possible downgrade will consider a repositioning of Portugal's ratings to reflect the potentially lasting deterioration in the government's debt metrics," says Anthony Thomas, Vice President-Senior Analyst in Moody's Sovereign Risk Group. "In the context of a small and slow-growing economy, such debt metrics may no longer be consistent with a Aa2 rating."
The weakening of Portugal's public finance position reflects the failure of successive administrations to consistently limit government budget deficits since Portugal joined the eurozone at its inception. "More recently, however, the government's has reiterated its objective to achieve or even surpass the deficit reduction targets published in its latest Stability and Growth Programme," says Mr. Thomas. "The well-structured debt profile means that refinancing risks are modest."
Moody's believes that increased risk discrimination in the financial markets may raise Portugal's financing costs for some time to come. Nonetheless, Moody's expects that debt service will remain very affordable in the near to medium term. Although its debt metrics may, on balance, turn out to be more consistent with a low Aa or a high A rating, the government's debt is neither unsustainable nor unbearable.
Portugal's growth challenges plus large fiscal deficits have led market participants to compare Portugal (and several other European countries) to Greece. Although Moody's believes that Greece faces far more serious fiscal difficulties than Portugal, the rating agency nevertheless sees an extended period of retrenchment for Portugal as inevitable until the country's domestic financial imbalances are corrected.
In addition to factors related to public debt sustainability, Moody's rating review will examine other aspects of the structural adjustment agenda -- in particular, the steps being taken by Portugal's policymakers to address the poor economic competitiveness and low domestic savings, which are at the root of the country's low trend growth rate. Moody's forecasts assume positive, albeit relatively slow, real economic growth.
"Portugal's growth problem is related more to its low productivity than its high costs per se," says Mr. Thomas. "The lack of a devaluation option creates stronger -- but not impossible -- headwinds for the country's economic recovery."
Portugal's country ceilings for bonds and bank deposits fall under the eurozone's regional ceilings and are therefore unaffected by this rating action.
The previous rating action on Portugal was implemented on 29 October 2009, when Moody's assigned a negative outlook to the government's Aa2 bond ratings.
The principal methodology used in rating the government of Portugal is Moody's Sovereign Bond Methodology, published in 2008, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
London
Pierre Cailleteau
Managing Director
Sovereign Risk Group
Moody's Investors Service Ltd. - England
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Arnaud Mares
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Anthony Thomas
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
The only trouble is that Spain, Portugal, and Greece are currently governed by left-wing socialist governments, not "right-wing" dictators or military regimes. What's more, the Socialists trounced the center-right in the most recent Greek elections in October 2009 in part because the conservatives were politically unpopular for pushing for an austerity package aimed at getting the country's fiscal house in order. From a New York Times article at the time:
In conceding defeat, Prime Minister Kostas Karamanlis said he had failed to persuade Greeks to accept the two years of austerity measures he had called for to steer the country out of its economic crisis. “The voters did not approve of this policy. It was their choice, and I respect it,” he said.
Mr. Karamanlis also stepped down as leader of the New Democracy Party, which suffered its worst performance since the restoration of Greek democracy in 1974 after years of military dictatorship. He said he would call a party congress to elect a new leader within a month.
Mr. Karamanlis, 53, called early elections last month, two years into a mandate dogged by corruption scandals and economic crisis, aiming to win a fresh mandate and stave off labor unrest. He had called for a freeze in public-sector wages to fight rising debt and unemployment, but he had difficulty pushing through important economic and structural reforms because he governed with a one-vote margin in Parliament.
Mr. Papandreou, 57, instead favored increased spending, including a $4.5 billion stimulus package to revive the Greek economy though infrastructure projects and environmentally sustainable development, while cracking down on tax evasion. Experts estimate that Greece loses $17.5 billion annually in unpaid income taxes and $13 billion in unpaid payroll taxes.
The victory by the Socialists here was a rare event for Europe, where the left has been losing ground and has often been unable to capitalize on the financial crisis for its own political gain.
But many Greek voters appeared to be voting against Mr. Karamanlis as much as for the Socialists. After two decades of Socialist rule, Mr. Karamanlis was elected in 2004 promising to restore faith in government.
For his part, Cramer failed to correct Matthews, agreeing with Matthews that:
You have a currency [the euro] that's made up of [countries run by] profligate right-wingers non-profligate, actually prudent somewhat left-wingers. I'm talking about Germany. Germany is the rock bed here.
Germany is governed by a center-right coalition led by conservative Chancellor Angela Merkel.
—Ken Shepherd is Managing Editor of NewsBusters. You can follow him on Twitter here
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