Portugal facing another downgrade

Moody’s Investors Service is more
likely to downgrade Portugal’s credit rating after putting it on a three-month
review than when it first placed the country on negative outlook last year, a
senior Moody’s analyst said.

We have sent a signal that it is
possible, and I have to say, statistically, there is a very strong likelihood
that if we put it on a review for downgrade then we follow through with a
downgrade,” Anthony Thomas, vice president at Moody’s Sovereign Risk
Group, said.

Moody’s said it could downgrade
Portugal’s Aa2 ratings by one, or at most two, notches, citing “the recent
deterioration of Portugal’s public finances as well as the economy’s long-term
growth challenges,” especially due to low competitiveness.

However, Thomas said the downgrade
was not completely certain and the agency was planning to meet Portuguese
authorities to discuss its austerity program, including a decision last week to
bring forward some measures to this year from 2011.

In January, Thomas said that if
Portugal wanted to avoid a downgrade it would have to take meaningful, credible
steps to get the deficit under control. Since then, the government has approved
an austerity strategy to slash the budget deficit to 2.8 per cent in 2013 from
last year’s 9.4 per cent, which includes caps on public sector wages, lower
public investment and some new taxes.

“We had initial indications
(that Portugal was doing what is required to avoid downgrade) in the stability
program but there were some gaps in that,” Thomas said.

Even if Moody’s makes a two-notch
rating cut, its rating on Portugal will be higher than that of Standard &
Poor’s agency, which last week downgraded Portugal by two notches to A-,
causing a massive sell-off of Portuguese assets.