Moody’s Puts Portugal’s Aa2 Credit Rating on Review for Downgrade

Moody’s Investor Services (MCO) placed Portugal’s Aa2 sovereign debt rating on review for a possible downgrade, as a result of the recent deterioration in the country’s public finances as well as its long-term growth prospects, the rating agency said Wednesday in a statement.

According to Moody’s, Portugal’s rating could fall by one, or at most two, notches and that its review, which had been on negative outlook since October 2009, is expected to be concluded within three months.

“The review for possible downgrade will consider a repositioning of Portugal’s ratings to reflect the potentially lasting deterioration in the government’s debt metrics,” said Anthony Thomas, vice president-senior analyst in Moody’s Sovereign Risk Group. “In the context of a small and slow-growing economy, such debt metrics may no longer be consistent with a Aa2 rating.”

Moody’s believes that increased risk discrimination in the financial markets may raise Portugal’s financing costs for some time to come. Nonetheless, the rating agency said it expects that debt service will remain quite affordable in the near to medium term. Although its debt metrics may, on balance, turn out to be more consistent with a low Aa or a high A rating, the government’s debt is neither unsustainable nor unbearable.

“Portugal’s growth problem is related more to its low productivity than its high costs per se,” Thomas said. “The lack of a devaluation option creates stronger — but not impossible — headwinds for the country’s economic recovery.”

Last week Standard & Poor’s issued a two notch downgrade of its own on Portugal, to A- from A+, causing a massive sell-off of Portuguese assets.

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