Sat, Dec 25, 2010 - Page 10 News List

Portugal’s credit rating downgraded

TROUBLED ECONOMY:The country’s current account deficit has averaged about 10 percent of GDP over the past decade and net debt is equivalent to 90 percent of GDP

AP and AFP, LONDON and HONG KONG

Portugal has had its credit rating downgraded by Fitch Ratings amid mounting concerns over the country’s ability to raise money in the markets to finance its hefty borrowings.

Fitch said on Thursday it was reducing its rating on the country’s debt by one notch to A+ from AA- and warned that further downgrades may be in the offing by maintaining its negative outlook.

“The downgrade reflects an even slower reduction in the current account deficit and a much more difficult financing environment for the Portuguese government and banks than incorporated into Fitch’s previous rating [in March], as well as a deteriorating near-term economic outlook,” Fitch said in a statement.

Fitch’s downgrade follows a warning earlier this week from rival Moody’s Investor Services that it may cut its A1 rating on Portugal by a notch or two because of uncertain economic growth, the high cost of borrowing on global markets and worries about the banking sector.

Fitch’s reasoning is very similar and is likely to stoke renewed speculation that Portugal could well be the next country using the euro in need of financial help from its partners in the EU and the IMF — Greece and Ireland have already suffered the ignominy of being bailed out.

In Asian stock markets, shares fell in thin pre-Christmas trade yesterday as eurozone fears returned after Portugal’s debt rating was cut by Fitch.

Tokyo fell 0.65 percent, or 67.29 points, to 10,279.19 as exporters were hit by the euro’s weakness against the yen.

The euro stood at ¥108.99 in early Tokyo trade yesterday, slightly up from ¥108.83 in New York late on Thursday, but down from the ¥110 levels before Portugal’s downgrade.

The single currency was also at US$1.3127, slightly up from US$1.3118 in New York. The US dollar stood at ¥83.01, up slightly from ¥82.91.

“It’s starting to appear that the [weak] euro is going to plague the market next year as well,” Yutaka Yoshii, general manager at Mito Securities, told Dow Jones Newswires.

Hong Kong, which was on a half-day, ended 0.3 percent, or 69.17 points, lower at 22,833.80, while Sydney fell 0.45 percent, or 21.7 points, to 4,777.3.

Fitch said the Portuguese government would likely meet its target of reducing its budget deficit to 7.3 percent of national income this year, but voiced concern that this is heavily dependent on one-time measures, which don’t make a dent on the long-term state of the public finances.

As a result, Fitch said the government will find it “extremely challenging” getting the budget into shape, especially if, as the agency expects, the economy falls into recession next year.

The Portuguese government aims to reduce the budget deficit to 3 percent of GDP by 2012 and to just 2 percent by 2013, which would be extremely difficult if the eurozone’s smallest economy starts to contract again — in effect, lower growth means lower tax receipts and higher social spending, hardly conducive to budgetary health.

“Failure to meet its 2011 budget headline and structural deficit targets would erode confidence in the medium-term sustainability of public finances that underpins Portugal’s current sovereign ratings,” Fitch said.

Portugal’s current account deficit, effectively its trade deficit, has averaged about 10 percent of GDP over the last decade and net debt is equivalent to 90 percent of GDP, the third-highest in the eurozone.

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