27 March 2013

Moody's affirms Portugal's Ba3 ratings and negative outlook

The drivers for maintaining the negative outlook on Portugal's sovereign ratings:

1. The euro area's continued vulnerability to shocks emanating from the regional debt crisis, most recently the agreement by the European Union (EU) to the "bail-in" of bank deposits to raise part of the funds needed for Cyprus' financial rescue.
2. Portugal's very high level of government debt and its continued large deficit.
3. The country's weak economy, which is likely to undergo a larger-than-expected contraction this year, and the risks this poses to the stabilisation of Portugal's debt metrics in 2014-15.

The drivers for affirming Portugal's Ba3 sovereign ratings are:

1. Portuguese policymakers' significant progress in achieving fiscal consolidation and implementing structural reforms in the context of the economic adjustment programme by the EU and International Monetary Fund (IMF).
2. Portugal's progress in regaining market access in recent months, a prerequisite for the country to successfully exit the EU/IMF support programme in May 2014 without needing a second bailout.

Moody's would consider downgrading Portugal's sovereign ratings in the event of a further significant rise in the government's debt ratio as a result of an inability to sustain sufficiently large primary surpluses, which would in turn lead to a second bailout.

Moody's would consider raising Portugal's rating outlook and eventually upgrading the country's government bond ratings if the government's financial balance, excluding interest payments, were to move into a surplus large enough for the country's debt-to-GDP ratio to stabilise and then begin to decline.

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