Moody's may cut Portugal's rating further

City A.M. Reporter
CREDIT rating agency Moody’s Investor Service has warned that debt-ridden Portugal's A1 rating may be the next to be downgraded by one or two notches after a review that will take up to three months.

The agency attributed the change to the EU state’s weak growth prospects and high borrowing costs – but said its solvency was not in question.

Portugal has moved into the eye of the storm in Europe’s debt crisis, with markets worried it will be next to take a bailout after Ireland and Greece.

The cost of insuring Portuguese sovereign debt against default rose in response and the euro slipped slightly.

The premium that investors demand to hold Portuguese ten-year bonds rather than safer German Bunds rose nine basis points from Monday’s settlement levels to 368 bps. Last month, the spread hit a euro lifetime record of over 481 bps, but has narrowed since thanks to bond buying by the European Central Bank.

Moody’s said it had concerns about Portugal’s ability to access capital markets at a sustainable price and cited “uncertainties about Portugal's longer-term economic vitality, which will be exacerbated by the impact of fiscal austerity”.

It said that if the government sought an international bailout, it would have a positive impact on short-term uncertainties, but would raise concerns about medium-term access to private market funding.

“The likely deterioration in debt affordability over the medium term and ongoing concerns about the economy’s ability to withstand fiscal consolidation and private sector de-leveraging mean its outlook may no longer be consistent with an A1 rating.” said Anthony Thomas, Moody’s lead analyst for Portugal.

The agency also said it was concerned the government may need to support the banking sector for it to regain access to private capital markets, which may have an impact on the country's debt metrics.