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Fitch downgrades Portugal over budgetary largesse

Video by Jonathan CRANE

Text by News Wires

Latest update : 2010-03-25

Portugal's government vowed Wednesday to clean up its public finances after rating agency Fitch downgraded its creditworthiness, pushing European stocks and an already battered euro lower.

REUTERS - Fitch Ratings cut Portugal’s sovereign credit rating by one notch to AA- on Wednesday, citing budgetary underperformance in 2009 and warning that a similar outcome this year and next could cause another downgrade.

The change underlined concerns that the debt troubles that have afflicted Greece will move to other of the euro zone’s weaker economies, and it drove European stocks and an already battered single currency lower.

The premium Portugal has to pay on its bonds compared to German Bunds briefly hit a high of 129 basis points after the announcement but then began to tighten again, and analysts said the move had been well-flagged by Fitch and still left the rating comparable with other agencies.

Fitch also said the government’s long-term budget austerity plan was broadly credible

and it did not expect political instability to upset the passage of the necessary legislation.

“The downgrade has more of an impact on the wider sovereign debt crisis, rather than Portugal at the moment,” said Peter Chatwell, bond analyst at Credit Agricole in London.

“Fitch were in the middle of Moody’s and S&P in terms of their rating, so this downgrade has minimal material impact, and doesn’t necessarily mean others will follow,” he added.

Fitch’s AA- rating is now comparable with Moody’s Aa2 rating and both are above S&P’s A+. In any case, the rating remains in Fitch’s “very high quality” range.

“The market is taking it very well. AA- is still respectable credit and bears no comparison with Greece,” said Kenneth Broux, an economist at Lloyds TSB. Fitch rates Greece BBB+.

Opposition urged to show support for austerity

The finance ministry after the decision again urged the opposition to support the government’s long-term austerity plan to send a clear signal to calm jittery investors about the country’s public finances.

The minority Socialist government on Thursday will ask parliament to pass a resolution of support for the plan, which seeks to cut the deficit to 2.8 percent of gross domestic product in 2013 from 9.3 percent last year.

“It is fundamental that Portugal show a firm political effort in implementing its growth and stability programme, with a view to correcting public finances and reducing the foreign deficit through increased competitiveness,” the finance ministry said in an email to Reuters.

The leader of the largest opposition party, the Social Democrats, was meeting members of parliament from her party on Wednesday to discuss the programme. It was not yet clear whether the party will decide on how it votes.

An abstention by the Social Democrats would allow the ruling Socialists to pass the resolution, which analysts say would pre-commit parliament to approve specific bills to meet the programme’s targets. The opposition party abstained in the vote on the 2010 budget on March 12, allowing its passage.

Finance Minister Fernando Teixeira dos Santos warned on Tuesday that without the political consensus, the programme would have no purpose and fears about Portugal’s ability to finance itself will persist.

Although Fitch said the programme was credible, it saw a “significant” risk of macroeconomic disappointment with knock-on effects for the deficit particularly in 2012-2013.

In the meantime, the agency said the likelihood of Portugal facing a liquidity crisis was low.
 

Date created : 2010-03-24

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