Portugal may need to come up with more austerity measures in next year’s budget to avoid a further revision of its credit rating, Moody’s Investor Service said after cutting the country’s debt by two notches to A1.
The move sent the euro lower, but broad market reaction was relatively muted as the cut only saw Moody’s make up ground with rival agency Standard & Poor’s (S&P), which still rates Portugal two grades lower at A-.
“It doesn’t have the same impact as it would if the likes of S&P were to downgrade, given the move only brings [Moody’s] in line,” said Sean Maloney, rate strategist at Nomura.
S&P cut Portugal by two notches in April.
Moody’s said in a statement after a review that started in May it expected the government’s “debt metrics to continue to deteriorate for at least another two to three years, with the debt-to-GDP and debt-to-revenues ratios eventually approaching 90% and 210%, respectively.”
“Moody’s also remains concerned about the economy’s medium-term growth potential,” it said.
Prospects were likely to remain relatively weak unless structural reforms bore fruit over the longer term, it added, explaining the downgrade.
Anthony Thomas, vice president of Moody’s Sovereign Risk Group, said that Portugal remained in the high end of investment grade and its outlook was now stable, which means there is no revision planned for at least 12 months.
“Also, we think that upside risks offset downside risks such as an even weaker growth and interest rates remaining high,” Thomas said, adding that the upside risks involved mainly “an even more aggressive consolidation.”
He said that while the government’s budget consolidation targets for this year looked credible, “there is a strong pressure on the government to meet 2011 targets and we believe it will come up with more measures in the 2011 budget.”
David Tinsley, economist at National Australia Bank, said the downgrade “is going to weigh on the euro in the short term and doesn’t bode well ahead of the bank stress tests due next week.”
The euro fell 0.4 percent to US$1.2531 yesterday after Portugal’s sovereign debt rating downgrade and ahead of Greece’s return to capital markets for the first time since late April.
Investors were already cautious ahead of the sale of Greece’s 1.25 billion euros (US$1.57 billion) of six-month Treasury bills.
The sale could prove to be a litmus test for the euro in the short term ahead of the results of the euro zone banks’ stress tests next week, traders said.
The 26-week treasury bills will mature on Jan. 14, the Greek debt management agency said.
The auction comes two months after Greece was rescued from insolvency by a 110 billion euro loan from the EU, the European Central Bank and the IMF.
The country is laboring under a mountain of debt approaching 300 billion euros and its economy is trapped in recession.
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