Moody’s downgrades Portugal on bailout fears
Moody’s Investors Service on Tuesday delivered the latest in a series of ratings-agency downgrades to Portugal’s government bonds, citing fears the country will have difficulty meeting its deficit-reduction goals and underlining expectations the country will be forced to seek a bailout.
Moody’s said it sees increased political, budgetary and economic uncertainty in Portugal. The country’s minority government recently fell apart after failing to win support in parliament for a fourth round of austerity measures, setting the stage for a June 5 general election.
Euroview: Look away from Libya to explain $120 oil
Brent crude oil prices are at $120 a barrel for the first time since 2008, and for the first time in weeks, the rally isn't tied to Libya. Instead, it's surprisingly robust demand that's propelling prices ever higher.
Moody’s cut Portugal's rating by one notch to Baa1 from A3 and put the rating on review for a possible further cut. The move comes after Moody’s cut Portugal’s rating by two notches last month.
“Moody’s believes that the government’s current cost of funding is nearing a level that is unsustainable, even in the short term. A critical part of the review will focus on the ability of the government to secure financing at a less elevated level, either through the capital markets or through [European Union] support,” Moody’s said.
Portuguese bond yields have soared to unsustainable levels in recent weeks, feeding speculation Lisbon will eventually be forced to follow fellow euro-zone members Ireland and Greece in seeking an international bailout in order to meet its funding needs.
In the wake of the downgrade, the cost of insuring Portuguese government debt against default through credit default swaps topped the cost of insuring Irish government debt for the first time since August.
The spread on five-year Portuguese sovereign CDS widened to 598 basis points from 580 on Monday, according to data provider Markit.
That means it would cost $598,000 annually to insure $10 million of Portuguese debt against default for five years versus $580,000 on Monday. The Irish CDS spread narrowed 8 basis points to 590.
The euro (U.S.:EURUSD) weakened slightly in the wake of the downgrade and changed hands in recent action at $1.4182 versus the dollar, a decline of 0.3%.
In Lisbon, the benchmark PSI 20 stock index fell 1% on Tuesday to end at 7,792.25.
Portugal recently announced that its budget deficit was 8.6% of gross domestic product last year, above the government’s target of 7.3%. The 2009 deficit was revised up to 10% from a previous estimate of 9.3%.
Portgual faces a total of around 9 billion euros ($12.8 billion) in government bond redemptions in April and June.
Moody’s cited the budget revisions as a reason for the downgrade, as well as the nation’s “uncertain political outlook” and “short- and medium-term funding challenges.”
Moody’s said the rating wasn’t lowered further due to the agency’s expectations that assistance would be provided by other euro-zone members if Portugal needs financing before it can obtain funds from the European Financial Stability Facility, the region’s bailout mechanism.
Moody’s said Portugal’s next government “will likely approach the facility as a matter of urgency.”
Fitch Ratings cut Portugal’s rating by three notches to BBB-minus from A-minus on Friday. A cut by Standard & Poor’s last week left Portugal’s rating one notch above junk status at BBB-minus