Is Portugal the next of the porcine-acronym peripheral eurozone countries to send jitters through the market?
Like Greece, the Iberian nation has racked up its fair share of foreign investment in recent years. This chart, from Deutsche Bank’s fixed income team and focused on foreign bank holdings of Greek government debt, is worth reprising:
Portugal submitted a draft of its 2010 budget to parliament on Tuesday. The proposed fiscal-tightening was quite modest for the year, while the budget deficit for 2009 was revised from a previously estimated 8 per cent of GDP to a new estimate of 9.3 per cent. Ouch.
And the result — two warning shots from ratings agencies Fitch and Moody’s.
Fitch’s statement came out on Wednesday:
LISBON, Jan 27 (Reuters) – A downgrade for Portugal’s credit rating is “more likely than not” after its 2009 budget deficit was worse than expected, Fitch Ratings said on Wednesday, prompting the government to ask ratings agencies not to rush to judgement on any downgrade decisions.
With European financial markets weighed down by worries over how Greece can dig itself out of a funding crisis, investors are eyeing Portugal and the euro zone’s other heavily-indebted peripheral countries for signs of whether they could be next.
Douglas Renwick, associate director with Fitch Ratings told Reuters on Wednesday the agency maintains a negative outlook on the country’s credit ratings after the government put its 2009 deficit estimate at 9.3 percent of gross domestic product.
Moody’s statement, meanwhile, was released on Thursday morning.
And while the rating agency didn’t say anything explicit about a downgrade, they do have some interesting words on the debt affordability of a country like Portugal, as the eurozone’s economic recovery exposes discrepencies between members:
As other Eurozone members are likely to register more robust recoveries, there also is a risk that interest rates in the single currency area may rise faster than would be appropriate for Portugal. Given that the Portuguese government is no longer in the low-debt category and the challenges it faces ensuring sustained deficit reduction, the rating agency adds that higher interest costs also pose concerns about Portugal’s debt affordability going forward. Moody’s rating decisions for all countries are driven by this factor along with the rating agency’s assessment of debt reversibility and debt finance-ability.
“Finance-ability — at a cost — is not in question for the foreseeable future for a Eurozone country such as Portugal, or even for Greece, which is rated 3 notches lower at A2,” says Mr. Thomas. However, how far debt affordability will deteriorate and how reversible are questions that underlie the negative outlook on Portugal’s Aa2 rating. As a result, only a transparent and credible plan for deficit reduction will be sufficient to stabilise the rating where it currently stands.”
Related links:
If I had a pound, peseta, drachma or a deutsche-mark… – FT Alphaville
The sovereign debt premium – FT Alphaville
Can the eurozone survive economic recovery? – Martin Feldstein
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