Portugal and Greece Again By MATTHEW SALTMARSH
March 29, 2011
Jose Manuel Ribeiro/Reuters
A shop window in downtown Lisbon. S.& P. warned that Portugal would probably need a bailout.
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Francisco Seco/Associated Press
José Sócrates
S.& P. cut Portugal’s rating to BBB– from BBB, with a negative outlook, the agency’s second downgrade of the country since Friday. BBB- is the agency’s lowest investment grade rating and is just one notch above junk. The Greek rating, which had already been cut to junk, was lowered to BB– from BB+.
Richard McGuire, a fixed income strategist at Rabobank in London, said the steps confirmed investor perceptions that Greece would have to default on some of it debt and that a similar outcome was “increasingly likely” for Portugal. He added that the European bailout mechanisms were inadequate, likening them to attaching a first-aid bandage “to a festering wound.”
“It’s a liquidity solution to a solvency problem,” he added.
The Portuguese government collapsed last week after it was unable to push further measures through Parliament to plug its deficit and fend off the need for outside aid. The country now faces weeks of political uncertainty before holding national elections.
S.& P. said the country would probably need an international bailout. Lisbon has about 9 billion euros ($12.7 billion) of bond redemptions falling due in April and June. Portugal’s cash position is sufficient to cover the April redemption, but not the one in June, analysts said.
The yields on benchmark euro zone government bonds pushed higher after the announcement of the downgrades. The yield on the Portuguese 10-year note hit 7.8 percent, around its highest level since the inception of the euro.
Mr. McGuire said that investors had been dumping short-dated Portuguese debt this week to protect themselves from default, making it harder for Lisbon to raise money by issuing short-dated bills and hence make it to June without a bailout.
If Fitch and Moody’s Investors Service both downgrade Portugal by one more notch, it will cost investors 5 percent more to use its debt as collateral in exchange for loans from the European Central Bank.
Meanwhile, investors are waiting for the results of a health check on Irish banks, scheduled for release by the Irish central bank on Thursday, and an announcement from the European Central Bank about a new facility to support struggling banks that will be focused initially on Irish lenders. In June, the results of stress tests on European banks, and steps to recapitalize them, will be announced.
Mr. McGuire said that countries like Ireland, Greece and Portugal would either have to default or “pray that a surge in economic growth comes along to save them.”
The euro was broadly steady, at $1.4088, from levels late Monday.
S.& P. said Portugal was likely to have to turn to the European Stability Mechanism, which is being set up by European countries, for aid. Unlike Greece, Portugal might be able to avoid restructuring its debt, but the agency said that the government’s unsecured debt, or debt issued without the security of an underlying asset, would probably be subordinated to future loans from the mechanism. The agency retained a negative outlook on its rating as the “macroeconomic environment could weaken beyond our current expectations.” It also said that “a political impasse could undermine the effective implementation of Portugal’s adjustment program.” S.&P. already cut Portugal’s rating on Friday, warning that it might do so again once the details of the new mechanism were announced. Fitch Ratings also cut Portugal’s ratings on Friday. Mr. McGuire of Rabobank said that once a bailout was arranged for Portugal, yields were not likely to come down much, until longer-term solutions to the regional banking problem emerge.
S.& P. said the Greek downgrade reflected the view that a sovereign debt restructuring was likely and would probably be a condition for Athens to borrow from the mechanism being established by the European Union. Likewise, senior unsecured Greek debt would be subordinated to loans from the fund, said Marko Mrsnik, a credit analyst at the agency.
The agency also cited “growing risks to Greece’s budgetary position.” Recently released provisional data on the government’s 2010 balance indicated “a relatively higher cash deficit and larger outstanding spending arrears than planned,” it said. That suggests that the 2010 deficit could exceed the government’s goal of 9.6 percent of gross domestic product. It also said the government was unlikely to hit its 2011 budget deficit goal of 7.5 percent of G.D.P.
“We believe that the government has not tightened spending controls sufficiently to prevent further accumulation of arrears in 2011,” it said. “Government revenues have been underperforming budgetary expectations, most recently in the current quarter.” It added that prospects for better tax collection remained uncertain because of the effects of weaker domestic demand and persisting inefficiencies of the tax administration
