Portugal and the credit crisis

[jdaw1]

Fitch Downgrades Portugal to 'AA-'

Fitch Ratings has downgraded Portugal's Long-term foreign and local currency IDRs to 'AA-' from 'AA'. The Rating Outlooks on the Long-term IDRs are Negative. Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than EU15 peers, which will put pressure on its public finances over the medium term.

Password-requiring press release.

[Andy Velebil]

Now if only the Euro would drop in value compared to the dollar by next Sept/Oct I would be elated.

[jdaw1]

Portuguese banks have hit out at credit rating agency Fitch and one lender has terminated its contract in a row over successive downgrades of their ratings due to funding and liquidity risks.

The dispute has been triggered by Portugal’s sovereign debt difficulties, which have virtually cut off access to capital markets for Portuguese banks, forcing them to rely heavily on funding from the European Central Bank.

Banco Espírito Santo, one of Portugal’s top five banks, said it was terminating its contract with Fitch Ratings because there was ‟no valid justification” for downgrading its credit rating by three notches in less than four months.

(Continued at the FT.)

I have never seen a downgrade to which the downgraded entity responds ‟not surprising, and a bit overdue”. Never. Stupider sovereigns threaten this and that (Turkey, in the 1990s, threatened a libel suit!); companies claim that the downgrade is unjustified. Always the way.

[jdaw1]

Portuguese rail and other services are grinding to a halt as workers strike over the Socialist government's planned cuts to ease the debt crisis.

Seven hours into the general strike, rail services were paralysed from the north to the south of the country, with nearly 80% of trains not running.

The country's main unions, the UGT and CGTP, hope their action will be the most effective in two decades.

It seems that the unions have decided that reducing Portuguese GDP is the way forward, to national economic suicide. Ludicrous.

[DRT]

It seems that the unions have decided that reducing Portuguese GDP is the way forward, to national economic suicide. Ludicrous.

Perhaps they read the same newspapers are their French commrades?

[jdaw1]

Moody's Portugal: Fundamental Credit Risk Conference - NEW DATE
Wednesday, 19-Jan-2011
09:00
Lisbon, PORTUGAL

[jdaw1]

Fitch has downgraded Portugal’s sovereign debt for the second time this year, citing a difficult financing environment for the government and banks as well as slow progress in reducing excessive external deficits.

The decision, which follows two downgrade warnings by other rating agencies this month, will add to investor fears that Portugal might be forced to follow Greece and Ireland in seeking an international financial bail-out.

[jdaw1]

Portugal’s cost of borrowing brushed close to euro-era highs on Tuesday as Germany resisted calls to bolster the eurozone’s bail-out fund for heavily indebted economies on the continent’s periphery.

Portuguese bond yields jumped above 7 per cent ”“ a level that Lisbon has admitted is unsustainable ”“ after concerns rose that the eurozone crisis could worsen, following comments from Wolfgang Schäuble, the German finance minister.

Mr Schäuble appeared to put the brakes on plans to increase the size and scope of the €440bn ($588bn) European financial stability facility, at the end of ministerial meetings in Brussels.

Ralf Preusser, head of European Rates Research at BofA Merrill Lynch Global Research, said: ‟Every time policymakers see an improvement in market sentiment, even if in anticipation of policy action, they feel they are justified in stepping back from support. The market had traded positively because of hopes that we would get meaningful changes to the size and scope of the EFSF. This has now not materialised.”

(Continued at the FT.)

[jdaw1]

Rede Ferroviária Nacional (Refer), Portugal’s railway infrastructure operator, has failed to go ahead with plans for a €500m syndicated bond in the first sign that Lisbon’s sovereign debt difficulties are spreading to the public sector.
!
Bankers in Lisbon and London said Refer had mandated !

But Refer decided in recent weeks not to proceed after the five-year government bond syndication traded poorly in the secondary markets, leaving investors sitting on losses. !

Refer is the first state-owned Portuguese company backed by a government guarantee that has had to shelve a planned syndication, !

(Continued at the FT.)

[jdaw1]

Portugal’s market interest rates have been above 7 per cent, a level widely considered unsustainable, for 24 consecutive days ”“ considerably longer than either Greece or Ireland managed before being forced to seek bail-outs.

(Continued at the FT.)

[jdaw1]

Portugal has announced tough new austerity measures including cuts of up to 10 per cent in state pensions in a bid to ease pressure building on the government to seek a financial bail-out.
!
‟There can no longer be any doubt that we will achieve our goals,” he said. The minister also announced labour market reforms to improve the competitiveness of the Portuguese economy, which is facing its second recession in three years.
!
But the measures failed to have a positive impact on Portugal’s cost of borrowing with the yield on 5-year government bonds rising to a new euro-era high of just under 8 per cent. The yield on 10-year bonds also rose to 7.565 per cent.

(Continued at the FT.)

[jdaw1]

Portugal’s debt rating was cut by Moody’s Investors Service, which cited a weaker outlook for economic growth, risks to the government’s deficit- reduction plans and a possible need to recapitalize banks.

The rating was downgraded to A3, four steps from so-called junk status, according to an e-mailed statement from Moody’s yesterday, with the outlook on the grade ‟negative.”

Whole story at Bloomberg News.

[JacobH]

Portugal PM Jose Socrates resigns after budget rejected

Portuguese Prime Minister Jose Socrates has resigned after parliament rejected an austerity budget.

The defeat is likely to trigger a bailout similar to the rescue packages Greece and the Republic of Ireland had to accept last year.

All five opposition parties voted against the austerity measures, which included spending cuts and tax rises.

Presumably, in the good old days, the escudo would have gone through the floor, taking Port prices with it...

[jdaw1]

Standard & Poor’s has cut Portugal’s credit rating by two notches, warning that the country’s political crisis heightened the risk that it would be unable to refinance its debt.

S&P's downgrade in Portugal’s long-term credit rating from A- to BBB is the lowest attributed by any rating agency, bringing Portugal’s credit standing closer to junk status.

S&P also warned that it could cut Lisbon’s rating by a further notch depending on the outcome of negotiations on the eurozone’s bail-out fund.

S&P’s decision on Thursday night came hours after Fitch Ratings downgraded Portugal’s long-term rating by two notches from A+ to A- because of increased financing risks caused by the fall of the Socialist government.

S&P and Fitch have both placed Portugal’s ratings on negative outlook, implying further downgrades could be made in the near future.

!

Interest rates on Portuguese government bonds of all maturities shot up on Thursday amid fears that the political void left by the prime minister’s resignation would make it difficult for the country to meet a total of €9.5bn in debt payments due in April and June.

More in the FT.

[jdaw1]

Standard & Poor’s has cut the credit ratings of Portugal’s five largest banks and warned that it could cut the country’s sovereign debt rating for a second time within a week following the resignation of José Sócrates, the outgoing prime minister.

The bank downgrades follow S&P’s decision to cut Portugal’s long-term sovereign debt credit rating by two notches to triple B on Friday, after the collapse of the Socialist government plunged the country into a period of political and financial uncertainty.

The agency warned on Monday that a further cut in Portugal’s sovereign rating ‟could take place as early as this week”. That would lower the rating to triple B minus, one level above junk status.
!
S&P lowered the long-term ratings of four banks ”“ Banco Espírito Santo, Banco BPI, Caixa Geral de Depósitos and Banco Santander Totta ”“ to triple B, in line with the agency’s sovereign rating for Portugal. The previous ratings were A for Santander Totta and A minus for BES, BPI and CGD.

More in that article in the FT.

[jdaw1]

Standard & Poor’s has cut Portugal’s credit rating to one level above junk status on concern that commercial investors would suffer under the terms of a Europe-led financial rescue.

Tuesday’s downgrade, the second in a week, comes after the fall of the Socialist government plunged the country into a political crisis. It sent Portugal’s borrowing costs soaring.

Shares in Portuguese banks also fell sharply as S&P said it would assess the impact on lenders of its cut in the country’s sovereign rating. The agency cut the ratings of five Portuguese banks on Monday.

S&P cut Portugal’s rating to the lowest investment grade of triple B minus. Another downgrade to junk would have far-reaching implications for Lisbon as many investors can only buy investment grade bonds.

Greece also saw its ratings cut two grades to double B minus, three levels below investment grade.

More in that FT article.

[jdaw1]

Portugal faces a deep recession and three years of tough austerity measures, according to its €78bn financial rescue package, in spite of the caretaker prime minister’s suggestions that the country has been granted more lenient terms than Greece or Ireland.

The agreement, a copy of which has been seen by the Financial Times, includes a freeze on public sector pay and pensions until 2013, as well as a special tax on pensions above €1,500 a month.

Continued in that FT article.

[jdaw1]

Tuesday’s Portuguese rescue deal is being sold as a way to buy time. The €78bn ($116bn) package, agreed with the European Union and the International Monetary Fund, is welcomed because Portugal will gain a few more years to delay fiscal adjustment. But the victory will be short-lived, for fiscal problems alone are not what ails Portugal’s economy.

The IMF’s acronym is said to stand for ‟It’s mainly fiscal”. This maxim has certainly been applied by the IMF and the EU to Portugal, just as it was to the other struggling eurozone states. However, Portugal’s problem is one of foreign debt. Its ratios of public debt and deficit to gross domestic product are similar to France’s, yet France is not close to a fiscal crisis. This is because Portugal’s crisis is born not of public borrowing, but the debt of its private sector, in particular banks.

Continued in that FT article.

[jdaw1]

Moody's downgrades Portugal to Ba2 with a negative outlook from Baa1

The credit ratings agency Moody's Investors Service has downgraded Portugal's debt to junk status.

The agency said there was a growing risk the country would need a second bail-out before it was ready to borrow money from financial markets again.

Moody's was concerned that if there was a second bail-out, private lenders might have to contribute.

Portugal's government said Moody's had not taken into account the strong backing for austerity measures.

It said that the programme of economic measures announced last week was "the only way to reverse the course and restore confidence" in Portugal.

[JacobH]

Moody's downgrades Portugal to Ba2 with a negative outlook from Baa1

Apologies for my ignorance, but how does the Moody’s rating system work if it goes from Baa1 to Ba2 (and presumably then on to Ba2 with a negative outlook)...?

[jdaw1]

See Wikipedia, or, far better, Pricing Money (2001), J. D. A. Wiseman.

As well as the rating (described on both of the above), there is also an outlook, which speaks of the likelihood of a rating change in the near future.

[JacobH]

See Wikipedia, or, far better, Pricing Money (2001), J. D. A. Wiseman.

I have been intending to buy a copy of that work for a while but keep holding off on the basis that a new edition is surely just around the corner

As well as the rating (described on both of the above), there is also an outlook, which speaks of the likelihood of a rating change in the near future.

I may not have been paying enough attending in my statistics lessons but surely if you say the outlook (meaning the likelihood of change) is negative, then you mean that it has already changed? And are ‟Speculative grade” ratings really known as either ‘‟High Yield” or ‟Junk”’, without irony?

[jdaw1]

I may not have been paying enough attending in my statistics lessons but surely if you say the outlook (meaning the likelihood of change) is negative, then you mean that it has already changed? And are ‟Speculative grade” ratings really known as either ‘‟High Yield” or ‟Junk”’, without irony?

It seems that you were paying plenty of attention. Market participants treat a directional outlook (positive or negative) as a fractional move in rating.

But sometimes companies being taken over have a non-directional ‘events might move this up or down’ outlook, which doesn’t quite fit the same model.

[jdaw1]

See Wikipedia, or, far better, Pricing Money (2001), J. D. A. Wiseman.

I have been intending to buy a copy of that work for a while but keep holding off on the basis that a new edition is surely just around the corner

Guarantee: if a new edition of Pricing Money by the same author is published in or before July 2013, I’ll swap your old for a copy of the new.

[DRT]

Where does one purchase this fine work to ensure that the author receives his appropriate share?

[jdaw1]

Where does one purchase this fine work to ensure that the author receives his appropriate share?

Pricing Money (2001), J. D. A. Wiseman

The author’s share is about £1 per copy.

[JacobH]

It seems that you were paying plenty of attention. Market participants treat a directional outlook (positive or negative) as a fractional move in rating.

But sometimes companies being taken over have a non-directional ‘events might move this up or down’ outlook, which doesn’t quite fit the same model.

Ah, so it’s the old tension between English-as-is-it-commonly-used and English-as-rendered-into-a-mathematical-formula?

Guarantee: if a new edition of Pricing Money by the same author is published in or before July 2013, I’ll swap your old for a copy of the new.

I was going to say that whilst I was not paying enough attention in my statistics lessons, I did read enough Adam Smith to realise that acceptance of this guarantee would have the opposite effect compared to that which was intended and that I would offer a guarantee of buying two copies of a new edition of Pricing Money if published in or before July 2013 by the same author but then I read this which rendered it all moot:

The author’s share is about £1 per copy.

[jdaw1]

Guarantee: if a new edition of Pricing Money by the same author is published in or before July 2013, I’ll swap your old for a copy of the new.

I was going to say that whilst I was not paying enough attention in my statistics lessons, I did read enough Adam Smith to realise that acceptance of this guarantee would have the opposite effect compared to that which was intended and that I would offer a guarantee of buying two copies of a new edition of Pricing Money if published in or before July 2013 by the same author

No. You buy Pricing Money today. Then I write the new edition this being neither started nor even envisaged. In that case, you may but are not obliged to swap your copy of the 2001 edition for a copy of the new, at no further cost to you.

[RAYC]

I remember as a child reading Jeffrey Archer and Geoffrey Archer novels interchangeably for a couple of years without noticing that they were, in fact, penned by different authors. So it amuses me when the "Julian Wiseman" search on amazon brings up this.

As the previous edition of "The Pig: A British History" also dates to 2001, perhaps it might be fun for each of you to broaden your expertise...!

[jdaw1]

Yes, I read the previous edition.

It is not by accident that the name on the cover of Pricing Money is ‟J. D. A. Wiseman”.

[jdaw1]

The Governing Council of the European Central Bank (ECB) has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government. This suspension will be maintained until further notice.

The Portuguese government has approved an economic and financial adjustment programme, which has been negotiated with the European Commission, in liaison with the ECB, and the International Monetary Fund. The Governing Council has assessed the programme and considers it to be appropriate. This positive assessment and the strong commitment of the Portuguese government to fully implement the programme are the basis, also from a risk management perspective, for the suspension announced herewith.

The suspension applies to all outstanding and new marketable debt instruments issued or guaranteed by the Portuguese government.

[jdaw1]

The title of this thread is ‟Portugal and the credit crisis”, but S&P’s downgrade of the USA is related, fascinating, and even more frightening.

[Glenn E.]

The title of this thread is ‟Portugal and the credit crisis”, but S&P’s downgrade of the USA is related, fascinating, and even more frightening.

Especially given the change in reasoning for the downgrade after the Treasury Department pointed out the colossal error in S&P's math.

[jdaw1]

S&P’s reasoning is not really about ability to pay. It is about willingness to pay. if the politicians want to fight at the cliff-edge, it is the job of the rating agencies to notice.

If the politicians were to repeal the law creating the debt ceiling, then S&P’s reasoning would compel a reinstatement of triple-A.

[Glenn E.]

S&P’s reasoning is not really about ability to pay. It is about willingness to pay. if the politicians want to fight at the cliff-edge, it is the job of the rating agencies to notice.

If the politicians were to repeal the law creating the debt ceiling, then S&P’s reasoning would compel a reinstatement of triple-A.

I agree. However, S&P first attempted to explain the rating change based on some sort of math. In doing so, they made a 2 TRILLION dollar error which the Treasury Department gleefully pointed out. S&P then changed their reasoning to the above.

As if politics isn't bad enough, we now have meta-politics involving credit agencies.

[DRT]

Perhaps the credit rating agencies are as unable to cite the specifics of the real reason for their distrust of the politicians as I am wary of posting my thoughts here?

There is a very distressing and sickening undercurrent to the debate that took this to the edge of the cliff. Those who would use such motives to gain political advantage deserve no trust from rating agencies or anyone else.

[Glenn E.]

There is a very distressing and sickening undercurrent to the debate that took this to the edge of the cliff.

Don't tempt me.

Aside from the fact that I basically hate all politicians, I'm a centrist within the American political spectrum. I'm practically the very definition of neutral between the two major parties in the US, so you'd think I'd be the person that both parties would be trying to persuade. But what's been going on lately, specifically on one side, leaves me dumbfounded.

[DRT]

I'm no expert on the matter of credit ratings but the subject to which Glenn and I have alluded to above was, I suspect, sufficient reason for S&P to "find" a reason to downgrade the USA to simply teach them a lesson. The fact that they got it a bit wrong and then came up with another reason actually convinces me more that this was the case.

Most sensible parents, after a day where their children had been vile and disgusting creatures but then turned into angels just before Playstation/Xbox time, would follow through on the threat of the withdrawal of privileges that had been flagrantly ignored until the last possible moment. If that's what occurred here then well done S&P! Unfortunately, vile children seldom learn from only one lesson

[jdaw1]

The Portuguese government is planning the country's biggest spending cuts in 50 years, a move its finance minister described as "unprecedented".

Vitor Gaspar said the centre-right Social Democratic administration would reduce public spending from the current 44.2% of Portugal's annual economic output or GDP to 43.5% by 2015.

The government is aiming to meet its budget deficit reduction targets.

These were agreed when Portugal required a bailout in May.

[jdaw1]

Thousands of young unemployed professionals are escaping Portugal's crippling economic crisis by finding jobs in former colonies, such as Brazil and Angola. The reversal of traditional migration patterns is fuelling talk of a "lost generation".

The second possible stabilisation mechanism is labour mobility. When there are no jobs in Alabama the native Alabamans (or is that Alabamois?) pack their possessions, rent a small truck and drive to Illinois or New York or California, and work there instead. But this fails miserably in Europe: of course the Irish will continue to work in the UK, but language barriers hinder the movement of labour between the English-, French-, Spanish- and German-speaking blocks. Language is not a total barrier, but is a high enough barrier enough to allow enormous wealth disparity.

[RAYC]

A 3-month old story, but only just seen by me (and not something i have come across on this board).

Amazingly, as part of their strategy to close the deficit, the Portuguese government has swiped EUR8m of built-up IVDP reserves (alongside, it would seem, reserves of other public institutions in Portugal)

Full story, together with Paul Symington's thoughts on this turn of events, here

[DRT]

I've missed this story completely, as well as the more recent story here about violence in Regua and the dismissal of the IVDP President last week.

Any objections to moving these out of MD, and also posting on FTLOP?

The port-drinking world needs to know about such things!!

[jdaw1]

Start a new thread, neatly quoting from here as appropriate.

[DRT]

Start a new thread, neatly quoting from here as appropriate.

Wilco. But have since noticed this thread on

[Alex Bridgeman]

A 3-month old story, but only just seen by me (and not something i have come across on this board).

Amazingly, as part of their strategy to close the deficit, the Portuguese government has swiped EUR8m of built-up IVDP reserves (alongside, it would seem, reserves of other public institutions in Portugal)

Full story, together with Paul Symington's thoughts on this turn of events, here

Wow, Paul didn't mince his words!

[jdaw1]

Fifteen European sovereigns put on creditwatch negative by S&P.

• Standard & Poor's has placed its 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on the Republic of Portugal on CreditWatch with negative implications.
• The CreditWatch placement is prompted by our concerns about the potential impact on Portugal of what we view as deepening political, financial, and monetary problems within the European Economic and Monetary Union.
• Our CreditWatch review will focus on the "political", "external", and "monetary" scores we have assigned to Portugal in accordance with our criteria.
• We expect to conclude our review as soon as possible after the European summit on Dec. 9, 2011.

[jdaw1]

• We are lowering our long- and short-term sovereign credit ratings on Portugal to 'BB/B' from 'BBB-/A-3'.
• The downgrade reflects what we view as the negative impact of deepening political, financial, and monetary problems within the European Economic and Monetary Union (eurozone) on Portugal's already challenging readjustment path and its elevated vulnerabilities to external financing risks.
• We are assigning a recovery rating of '4' to Portugal, which reflects our assessment of "average" (30%-50%) recovery in the event of a sovereign default.
• The outlook on the long-term rating is negative.

[/size]FRANKFURT (Standard & Poor's) Jan. 13, 2012--Standard & Poor's Ratings Services said today that it lowered its long-term sovereign credit rating on the Republic of Portugal by two notches to 'BB' from 'BBB-', and its short-term rating to 'B' from 'A-3'. The outlook on the long-term rating is negative.

Our transfer and convertibility (T&C) assessment for Portugal, as for all eurozone members, is 'AAA', reflecting Standard & Poor's view that the likelihood of the European Central Bank restricting nonsovereign access to foreign currency needed for debt service is extremely low. This reflects the full and open access to foreign currency that holders of euro currently enjoy and which we expect to remain the case in the foreseeable future.

At the same time, we assigned a recovery rating of '4' to Portugal's debt issues, indicating our expectation of "average" (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default.

The downgrade reflects our opinion of the impact of deepening political, financial, and monetary problems within the eurozone, with which Portugal is closely integrated. It also reflects our view of sustained external financing pressures on Portugal's private sector, and what these may imply for growth performance and, in turn, public finances.

The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures.

We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery". As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.

Accordingly, in line with our published sovereign criteria, we have adjusted downward the political score we assign to Portugal (see "Sovereign Government Rating Methodology And Assumptions," published on June 30, 2011). This is a reflection of our view that the effectiveness, stability, and predictability of European policymaking and political institutions (with which Portugal is closely integrated) have not been as strong as we believe are called for by the severity of a broadening and deepening financial crisis in the eurozone.

For Portugal, we believe this weakened policy environment could complicate domestic political support for the implementation of the EU/IMF program, put the government's fiscal consolidation strategy at risk, and trigger further increases in Portugal's already high net general government debt stock, which is expected to end 2012 at 106% of GDP. In our view, the debt restructuring process in Greece could further alienate potential investors in Portuguese government debt and reduce the likelihood that Portugal might be able to return to capital markets some time in 2013.

We have also lowered Portugal's external score according to our criteria, to reflect our view of the impact on Portugal of what we consider to be rapid deterioration in the European financial markets. We believe there are significant risks to Portugal's external financing over the next two years as creditors of its private sector, primarily other eurozone banks, are likely to reduce their exposures to Portugal more rapidly than previously anticipated, partly due to uncertainties on the EU's future crisis management policies. We believe that the proposed sale by Portuguese banks of external assets--given the deteriorating financial environment in Europe--is unlikely to generate financial inflows as planned. We think this will likely force the banks to deleverage more rapidly, and with a greater focus on domestic assets, than we had previously expected.

Portugal's ratings are also constrained by what we view as the country's very high public sector debt and weak economic growth potential. The ratings are supported by our view of the currently strong commitment to fiscal consolidation and extensive program of structural reform under the EU/IMF program.

Together with the lowering of our ratings on Portugal to 'BB/B', we have also assigned a recovery rating of '4' to Portugal's debt. This is in keeping with our policy to provide our estimates of likely recovery of principal in the event of debt restructuring or a debt default for issuers with a speculative-grade rating. A recovery rating of '4' reflects our current expectation of "average" (30%-50%) recovery for holders of Portuguese government debt.

The outlook on the long-term rating on Portugal is negative, indicating that we believe there is at least a one-in-three chance that we could lower the ratings again in the next 12 months. In our view, a more severe economic contraction could result in a worsening political environment in Portugal and further negative adjustment in our political score, according to our criteria. In particular, continued fiscal austerity without improving growth prospects could result in widespread unemployment, which could negatively affect social cohesion and political support for the EU/IMF program. We could also lower the ratings if we come to the view that the potential cost of recapitalizing Portuguese banks is likely to increase the government debt burden substantially.

Conversely, the ratings could stabilize at the current level if Portugal achieves full compliance with the EU/IMF official lending program, in particular, fully implementing structural reforms and lifting growth prospects; or successful sales of assets in the public and private sectors generate substantial inflows of funds to mitigate external liquidity constraints.

[jdaw1]

Portugal is trading in default territory after investors offloaded the country’s bonds this week amid rising fears of contagion. Worries are mounting that the private sector and Greece will fail to agree a restructuring package for Athens’ debt.

Many investors were also forced to sell Portuguese bonds after Standard & Poor’s downgraded the country to junk on Friday. Other funds sold Portuguese debt after Lisbon was removed from Citigroup’s European Bond Index, which these investors track, because of its fall to junk status.

All three main credit rating agencies, S&P, Moody’s, and Fitch, rate Portugal as junk, below investment grade. In the eurozone, only Greece is also rated junk by all the agencies.

The markets are pricing in a 65 per cent chance that Portugal will default over the next five years, according to credit default swaps as these instruments, which protect investors from default, leapt to record highs this week.

Portuguese bond prices have slumped to levels considered by many investors to be in default territory. Bond prices for benchmark 10-year debt were trading at 52 per cent of par, recovering from levels below 50 per cent on Monday.

Continued in that article in the FT.

[jdaw1]

Portugal’s borrowing costs leapt to fresh euro-era highs on Wednesday amid growing worries that Lisbon could eventually default on its debt commitments.

Portuguese yields, which move inversely to prices, hit the highs for five- and 10-year bonds, while the cost of buying insurance against default, as measured by credit default swaps, also rose to a record.

One banker said: ‟Greece will default. The market is convinced of that. But now Portugal is increasingly being considered as likely to follow. There is not enough time for the country to bring its economy round and bring government bond yields back to sustainable levels.”

Continued in the FT.

[jdaw1]

The programme is on track, but challenges remain. Policies are generally being implemented as planned, and economic adjustment is under way. In particular, the large fiscal correction in 2011 and the strong 2012 budget have bolstered the credibility of Portugal’s front-loaded fiscal consolidation strategy. Financial sector reforms and deleveraging efforts are advancing, while steps are being taken to ensure that credit needs of companies with sound growth prospects are met. Reforms to increase competitiveness, growth and jobs have also progressed, although many reforms still await full implementation. The broad political and social consensus that is underpinning the programme is a key asset.