Portugal's debt credit rating is cut to junk by Fitch
Published 25/11/2011 | 05:00
PORTUGAL'S credit rating was cut to below investment grade by Fitch Ratings due to the country's rising debt level and weakening economy.
The long-term rating was lowered one level from BB+ to BBB- with a negative outlook, Fitch said yesterday. Portuguese 10-year bonds fell after the announcement, with the yield at 12.14pc.
"The country's large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign's credit profile is no longer consistent with an investment-grade rating," Fitch said.
The ratings of utility EDP-Energias de Portugal and telecommunications company Portugal Telecom are unaffected, Fitch said.
Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a €78bn bailout plan from the European Union and the IMF.
As the country's borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout and now aims to return to bond markets in 2013.
Barclays Capital said it would cut Portugal's government bonds from its Euro Treasury Index by December after the Fitch announcement. The move makes the bonds "ineligible" for inclusion in the index, Huw Worthington, a fixed-income strategist in London, said.
Citigroup said it would keep Portugal's bonds in its indexes after the downgrade. The company's bonds indexes use rankings from S&P and Moody's, said Nishay Patel, a fixed-income strategist at Citigroup in London. "A one-notch downgrade from S&P will take Portugal out of the index."
S&P cut the country's rating twice in March to BBB-, one level above junk status, and has a negative outlook. Portugal's rating was cut to below investment grade in July by Moody's. The long-term government bond ratings were lowered to Ba2 from Baa1.
The government aims to trim the budget deficit from 9.8pc of GDP in 2010 to 5.9pc in 2011, 4.5pc in 2012, and to the EU ceiling of 3pc in 2013. Debt will reach 100.8pc of GDP this year and peak at 106.8pc in 2013 before starting to decline, the government forecast. Debt was 93.3pc of GDP in 2010.
Fitch said its "base case" was that government debt would increase to around 110pc of GDP at the end of 2011 and peak at around 116pc at the end of 2013.
The rating company expects Portugal to meet its deficit targets for this year and next year.
"The 2012 budget contains significant expenditure reductions, mainly on pensions and civil-service pay," it said in the statement.
Portuguese Finance Minister Vitor Gaspar on November 16 said the second quarterly review of its financial-aid programme was "successful", allowing it to receive another rescue payment tranche of €8bn.
The so-called troika of the European Commission, ECB and IMF said that Portugal's plan was "off to a good start", adding that the 2012 budget includes "bold and welcome measures". (Additional reporting Bloomberg)