Portugal downgraded by S&P to A–

[jdaw1]

• Fiscal and economic structural weaknesses in our view leave the Republic of Portugal in a comparably weak position to address the significant deterioration in its public finances and expected lackluster economic growth prospects over the medium term.
• We are lowering our long-term ratings on Portugal to 'A-' from 'A+' and the short-term ratings to 'A-2' from 'A-1'.
• The negative outlook reflects our assessment of the risk of a further downgrade should fiscal consolidation fall short of expectations or should concerns over government liquidity mount.

FRANKFURT (Standard & Poor's) April 27, 2010--Standard & Poor's Ratings Services said today it lowered its long-term local and foreign currency sovereign issuer credit ratings on the Republic of Portugal to 'A-' from 'A+'. At the same time, the local and foreign currency short-term ratings were lowered to 'A-2' from 'A-1'. The outlook is negative. The 'AAA' transfer and convertibility assessment is unchanged.

"The two-notch downgrade reflects our view of the amplified fiscal risks Portugal faces," said Standard & Poor's credit analyst Kai Stukenbrock. "Under our revised base case economic growth scenario, we expect the Portuguese government could struggle to stabilize its relatively high debt ratio over the outlook horizon until 2013. Portugal's public finances in our view remain structurally weak, notwithstanding the government's substantial public sector reforms of recent years."

We believe past dependence on now more scarce external financing as a source of economic growth, and weak external competitiveness add to the likely adverse growth dynamics in Portugal. As a result, to reach its current targets we expect that the Portuguese government would need to implement fiscal consolidation over and above its current plans. Portugal's fiscal indicators, as well as its growth outlook, in our view compare unfavorably with the 'A' median for sovereigns.

We have revised downward our growth scenario for Portugal and now expect economic activity to stagnate in 2010. In our opinion, the economy's growth potential will likely remain subdued, constrained by weak international competitiveness, low productivity gains, stagnating investment growth, and falling domestic credit as the highly leveraged private sector reduces debt.

We also consider it likely that relatively rigid product and labor markets could impede growth prospects in Portugal, prolonging the adjustment in prices and wages we view as necessary to regain external competitiveness.

The government deficit rose to 9.4% of GDP in 2009 from 2.7% in 2008. The government initially chose to implement only limited consolidation measures in 2010, which is why we expect the deficit to remain high, at 8.5% of GDP in 2010. However, we understand that the government is now considering accelerating some consolidation efforts to 2010 that were initially intended for 2011.

We expect fiscal consolidation to progress at a slower pace than the government foresees, achieving a deficit of 4.1% of GDP by 2013. This is because we believe that there is implementation risk with regard to the government's announced program, particularly given that the minority government will need opposition support to pass necessary legislation. We also regard the government's growth assumptions as optimistic, in our view overstating the fiscal impact of cyclical recovery.

We expect government debt to continue to rise rapidly, to 95% of GDP by 2013 from 66% in 2008. Fiscal imbalances and high debt rollover in our opinion leave Portugal vulnerable to changes in investor sentiment. The resulting interest rate shock or further shocks to economic growth could in our view lead to a significantly more pronounced increase in the government's debt ratio.

"The negative outlook on Portugal reflects our assessment of the potential for a further downgrade if deficits and debt levels exceed our current expectations and if consolidation measures are not fully implemented," said Mr. Stukenbrock. "Meanwhile, sustained weak growth in nominal GDP could in our view also undermine the government's efforts to improve the general government deficit and debt ratios. Downward pressure on the ratings could also result from adverse interest rate shocks to government finances."

We could revise the outlook to stable should the government manage to achieve at least its baseline consolidation agenda and put the budget deficit on a credible and sustainable downward path, thereby establishing a clear perspective for stabilizing and eventually reversing the debt ratio.

Questions arising:

• How would a severe Portuguese austerity programme affect port makers?
• If Portugal were to default, would the government confiscate sellable assets of port companies? Should the port companies transfer old bottles to the UK, and to the ownership of a UK entity (not necessarily me)?

[g-man]

Perhaps transfer it over to a dollar denominated country (not necessarily me either) is what I feel is the most prudent thing to do.

[Andy Velebil]

Question for you financial people..where do you think the Euro will be headed later this year, say Sept-Oct? I ask as I am heading back to the Douro during harvest. And while I wish no ill will on any country, a more favorable exchange rate for this Yank would be most welcome.

[g-man]

Question for you financial people..where do you think the Euro will be headed later this year, say Sept-Oct? I ask as I am heading back to the Douro during harvest. And while I wish no ill will on any country, a more favorable exchange rate for this Yank would be most welcome.

if I could only predict with such accuracy.

that being said, I've bet a bottle of 2000 bordeaux that the Euro is going lower by december.

Short term outlook though, it appears to depend on what Germany wants to do along with how the US feds wish to persue the rates.

They're keeping it low, but as soon as they start raising rates, the dollar will strengthened.

Further, the more turmoil you have in europe over their crisis, the more people should flock to the dollar and gold as a safe haven.

And since i'm flying to Ireland tomorrow, I'm acutally hoping that exchange rate REALLY goes into my favor

[JacobH]

Questions arising:

• If Portugal were to default, would the government confiscate sellable assets of port companies? Should the port companies transfer old bottles to the UK, and to the ownership of a UK entity (not necessarily me)?

Highly unlikely that a government would confiscate salable assets. It would probably be unlawful under the first protocol to the ECHR:

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

I appreciate there may be public interest arguments but I doubt that many courts would find such confiscation in line with the "general principles of international law". It would also get them into significant trouble with the EU.

More significantly; the Port industry's gross income from exported Port sales was c.€300million last year. The Portuguese deficit is c.€140 billion. I think there are a great many more obvious targets for reducing that then the Port industry.

[jdaw1]

I think there are a great many more obvious targets for reducing that then the Port industry.

Shhhh: Taylor-Fladgate and the Symingtons were about to transfer all their pre-WW2 ports to me. Shhh!

[Rui Avis de Brito]

Hi there,

Although Portugal is a difficult situation, much to their own fault, there is a strong abuse of rating companies and financial agencies. It is a pure market manipulation that is going on. There are some investment agencies to sell millions of shares of Portuguese campanies before these news and buy when the news come at a price less 10%, a result of the news of the cuts in the rating.

For these agencies Portugal is an appetizer, soon will turn to our neighbor spain..

Best regards

[Roy Hersh]

Er ... check the newspaper, Spain was downgraded and yet the Euro maintained its value for the day. Even the overnights did not show much movement which seems odd. So with Greece, Portugal and Spain on the ropes (several others are pretty weak too) ... the Euro should be dropping faster than it has been.

They're keeping it low, but as soon as they start raising rates, the dollar will strengthened.

Yes, they have been keeping it low in hopes of generating investment by businesses, improving employment opportunities nationwide and preventing even more homeowners from facing foreclosures. However, the Fed is on the brink of raising rates and almost did so at this month's meeting. It may not happen in May, but unless something dramatic takes place to prevent it, the Fed will raise interest rates no later than June, in my opinion. This will directly translate to mortgages, HELOCs and even credit cards. But yes, it may and I repeat MAY, cause the strengthening of the USD.

[jdaw1]

However, the Fed is on the brink of raising rates and almost did so at this month's meeting. It may not happen in May, but unless something dramatic takes place to prevent it, the Fed will raise interest rates no later than June, in my opinion.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions ! are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Brave call by Roy Hersh.

[Roy Hersh]

Julian,

I've often times gone out way further on a limb, usually a young cask sample of VP is lurking out there.

[uncle tom]

I've been watching the slo mo train crash that is the eurozone for some time now..

The situation for Greece is acute now, and with 74% of their sovereign debt held by interests beyond their shores, there is a pressing case for them to break with the ECB, make the Greek euro a separate currency to the rest of the eurozone, and print their debts away.

Unfortunately, that is the nightmare scenario for the rest of the eurozone; although I am inclined to think it is ultimately inevitable anyway, and that any bail out will only serve as a delaying tactic (and an expensive one, at that)

The Portuguese situation also looks dire, but doesn't look immediately critical.

Across the developed world we have government borrowing on a massive scale, and the cumulative total is far in excess of savings, pension contributions and trade deficits combined. It follows that the balance can only be met by the creation of new money, and although it may not happen immediately, higher inflation and higher interest rates are an inevitable consequence.

Portugal simply cannot countenance higher interest rates. Their total debts (including private and commercial loans) amount to 300% of GDP. I don't have a figure for the percentage of that debt that is owned by foreign interests, but as Portugal is not a stronghold of the banking industry, I suspect that much of it is held offshore.

It follows that Portugal is also likely to break with Brussels, and print its way out of trouble; but when is a very hard call..

It's a messy business, as the solution for countries leaving the eurozone would almost certainly require a degree of statutory debt default, in order to protect private and commercial borrowers from excessive interest charges. The consequent banking losses might make the crisis just past look puny by comparison, especially if Spain and Italy join the exit gang.

The risk of international contagion is also very real, with the UK, US and Japan all very vulnerable to rising borrowing costs..

An unusually large proportion of Greek sovereign debt is held by French interests (about six times more than is held in the UK). I'm wondering what exposure AXA (owners of Noval) have to this...

Tom

[jdaw1]

The situation for Greece is acute now, and with 74% of their sovereign debt held by interests beyond their shores, there is a pressing case for them to break with the ECB, make the Greek euro a separate currency to the rest of the eurozone, and print their debts away.

The gravity of this is explained by a letter published by the Financial Times on Monday 29th March 2010 (author: yours truly).

Across the developed world we have government borrowing on a massive scale, and the cumulative total is far in excess of savings, pension contributions and trade deficits combined.

But a country’s borrowing is somebody else’s saving. Country issuing bond = borrower. Entity purchasing bond = saver.

It's a messy business, as the solution for countries leaving the eurozone would almost certainly require a degree of statutory debt default, in order to protect private and commercial borrowers from excessive interest charges.

Really really messy.

The risk of international contagion is also very real, with the UK, US and Japan all very vulnerable to rising borrowing costs.

Japanese yen 50-year swap rates are currently 2.35%. That isn’t huge. Further, the three countries you’ve mentioned have a big difference from Greece: they have sovereign control over their own currencies, which are, respectively, the currencies of denomination of almost all of their debt. The UK gov’t could, in extremis, avoid default by commanding the BoE to print banknotes in denominations of £squillions. (Don’t laugh: until recently largest £ banknotes were £100million have you got change for this love?)

[uncle tom]

But a country’s borrowing is somebody else’s saving. Country issuing bond = borrower. Entity purchasing bond = saver.

Try totting the numbers - borrowing is outstripping saving on a massive scale. For 'borrowing', read 'printing' - in one form or another...

Japanese yen 50-year swap rates are currently 2.35%. That isn’t huge.

Japan is locked into progressive deflation, which keeps interest rates low, while at the same time steadily reducing their ability to pay their debts. They are also seeing a population shrinkage of 0.2% p.a. Factor out the deflation element, and they are in much the same position as the UK and US (bad!). Add in the effect of their shrinking population, and they appear more vulnerable.

Tom

[Rui Avis de Brito]

Portugal simply cannot countenance higher interest rates. Their total debts (including private and commercial loans) amount to 300% of GDP. I don't have a figure for the percentage of that debt that is owned by foreign interests, but as Portugal is not a stronghold of the banking industry, I suspect that much of it is held offshore.
Tom

Hi uncle tom

Can you tell me your sources on the value of public and private debt?

According to my sources gross external debt of Portugal represents 226 percent of GDP..

Best regards

[Portman]

I hope our friends in Portugal see this through without too much damage. My relatives in Spain tell me everyone in Madrid is scared and people are losing their jobs left and right.

[uncle tom]

According to my sources gross external debt of Portugal represents 226 percent of GDP..

Most of the non-domestic stats I rely on are sourced from Bloomberg. Adding internal debt to your 226 figure makes the 300% figure credible, and similar to the Greek position - 75% vs 74%..

..Right now, I would advise anyone in Portugal with savings to transfer their money into a German bank account..

Tom

[Alex Bridgeman]

But a country’s borrowing is somebody else’s saving. Country issuing bond = borrower. Entity purchasing bond = saver.

Hmm, perhaps, but not the way that I would have expressed it. Many of the bond purchasers will be banks leveraging their capital bases to the extent permitted by their local regulators. I don't really see this investment activity as "saving".

(Don’t laugh: until recently largest £ banknotes were £100million have you got change for this love?)

I found this the most interesting part of the discussion. Until now, I hadn't known that these big notes had ceased to be used. Have all UK retail banks now lost their rights to print money?

[DRT]

In an attempt to save this thread from straying too far away from a port-related subject...

Without using google or anything similar: explain or guess the connection between the term "Bond", as it applies to the financial instruments discussed above, and the reason why a "Bonded Warehouse" is known by that name?

[jdaw1]

(Don’t laugh: until recently largest £ banknotes were £100million have you got change for this love?)

I found this the most interesting part of the discussion. Until now, I hadn't known that these big notes had ceased to be used. Have all UK retail banks now lost their rights to print money?

Be it enacted by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:

217 Backing assets
!
(2) ‟Backing assets” means assets of a kind specified by banknote regulations; and the regulations may, in particular, specify
(a) banknotes issued by the Bank of England,
(b) current coins of the United Kingdom, and
(c) funds in a specified kind of account held with the Bank of England or with another specified institution or class of institution.

The last is new, and designed to permit scrapping of giants and titans.

[g-man]

In an attempt to save this thread from straying too far away from a port-related subject...

Without using google or anything similar: explain or guess the connection between the term "Bond", as it applies to the financial instruments discussed above, and the reason why a "Bonded Warehouse" is known by that name?

The warehouse is shaken not stirred.

[DRT]

The warehouse is shaken not stirred.

No, Miss Money-penny, it wasn't.

[mosesbotbol]

With the recent influx of money poured into Europe, shouldn't the Euro go down over this summer and fall?

[Glenn E.]

With the recent influx of money poured into Europe, shouldn't the Euro go down over this summer and fall?

Most of the talking heads I'm seeing are saying that it will probably go back up now that Europe has taken a strong stance to defend its value. So if you're buying Euros with Dollars, now might be the time to do it.

Of course, some of the talking heads are still saying it could go down to $1.20... so ya rolls yer dice and takes yer chances.

[JacobH]

With the recent influx of money poured into Europe, shouldn't the Euro go down over this summer and fall?

Most of the talking heads I'm seeing are saying that it will probably go back up now that Europe has taken a strong stance to defend its value. So if you're buying Euros with Dollars, now might be the time to do it.

Of course, some of the talking heads are still saying it could go down to $1.20... so ya rolls yer dice and takes yer chances.

It’s sliding quite a bit against the Pound Sterling and the USD; it made it down to $1.21 yesterday. Dare we hope that this will be reflected in Port prices soon?

[Glenn E.]

With the recent influx of money poured into Europe, shouldn't the Euro go down over this summer and fall?

Most of the talking heads I'm seeing are saying that it will probably go back up now that Europe has taken a strong stance to defend its value. So if you're buying Euros with Dollars, now might be the time to do it.

Of course, some of the talking heads are still saying it could go down to $1.20... so ya rolls yer dice and takes yer chances.

It’s sliding quite a bit against the Pound Sterling and the USD; it made it down to $1.21 yesterday. Dare we hope that this will be reflected in Port prices soon?

I doubt it, mostly because the Port has already been sold and shipped. If stays down long enough, though, it might affect 2008 (SQ)VP prices.