Portugal may have its credit rating cut by Moody’s Investors Service for the first time as the country struggles to reduce its budget deficit and revive economic growth a sign that contagion from the Greek crisis is spreading.
Moody’s today placed its Aa2 rating on review for a possible downgrade, a process that will conclude within three months, the company said in a statement. Portugal has held the third-highest Moody’s investment grade since 1998.
Investors are shifting their attention to Portugal after surging bond yields forced Greece to seek a 110 billion-euro ($142 billion U.S.) bailout from the euro region and the International Monetary Fund. The extra yield they demand to hold Portuguese 10-year bonds over German bunds was close to the highest level today since 1997 and Bundesbank President Axel Weber warned that the euro region faces "grave contagion effects."
"Today’s rating action reflects the recent deterioration of Portugal’s public finances as well as the economy’s long-term growth challenges," Moody’s said. The company "believes that increased risk discrimination in the financial markets may raise Portugal’s financing costs for some time to come."
Portugal’s risk premium rose 43 basis points to 295 today after climbing as high as 299 basis points on April 28. The country’s short-term borrowing costs surged today as it sold six-month bills at an average yield of 2.955%, compared with 0.592% at a sale on Jan. 6.
Portugal’s budget deficit, 9.4% of gross domestic product, was the fourth-largest in the euro region last year and Standard & Poor’s cut its rating on the nation last week.
"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," Moody’s said.
Portugal’s public debt is 77% of GDP, and the government forecasts that will peak at 91% in 2012. Prime Minister Jose Socrates, who was re-elected last year, aims to reduce the budget gap to 8.3% of GDP this year and 2.8% in 2013.
Portugal’s economic growth rate, which hasn’t reached 2% in a year since 2001, may hinder his efforts. The government is forecasting 0.7% GDP growth this year. The country has the lowest productivity among the 16 countries using the euro, according to European Union statistics.
"Portugal’s growth problem is related more to its low productivity than its high costs per se," Moody’s analyst Anthony Thomas said in the statement.
Portugal is rated A- by S&P, its seventh-highest score, and AA- by Fitch Ratings, its fourth-highest rating.
