Portugal suffers S&P rating cut

Portugal on Wednesday became the third eurozone economy in two weeks to suffer a credit rating downgrade because of its failure to tackle deteriorating public finances.

Standard & Poor’s decision to reduce Portugal’s long-term ratings to AA minus, six notches below the highest triple A rating, followed downgrades of Spain on Monday and Greece last week. Ireland, which was put on negative outlook earlier in the month, could follow soon.

The move underlines the growing strains in the eurozone as the weaker economies, mainly in the south, struggle to stay competitive in the worsening economic climate without the option of devaluing their currencies.

The extra cost for Portugal, Spain, Greece and Ireland of issuing government bonds compared with that of Germany, Europe’s biggest economy has risen this week. This is because investors believe the continent’s smaller economies may suffer longer and deeper recessions.

The cost of insuring their government bonds against default through credit default swaps has risen to record highs, too, with investors judging the assets of these countries to be increasingly risky.

Portugal was forced at the weekend to downgrade its economic forecasts for 2009 in response to a “worsening external environment that cannot be ignored”.

Announcing supplementary budget measures, Fernando Teixeira dos Santos, its finance minister, projected a 0.8 per cent contraction in gross domestic product this year and a rise in the unemployment rate to 8.5 per cent.

This compares with forecasts made in October of minus 0.3 per cent and 7.7 per cent respectively.

S&P forecast Portuguese GDP would contract 1.5 per cent this year and 1 per cent in 2010, with long-term average growth predicted at 1.5 per cent, lower than the eurozone average of 2.2 per cent.

By David Oakley in London and Peter Wise in Lisbon
Published: January 21 2009 19:42 | Last updated: January 21 2009 20:28

Source: Financial Times

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