Portugal's Financial Independence Hangs by a Thread
April 29 2016 - 12:59AM
Dow Jones News
By Patricia Kowsmann
LISBON--Nearly two years after Portugal left a EUR78 billion
($88 billion) international bailout program, its financial
independence continues to hang by a thread.
That thread is a little-known Canadian firm, DBRS Ltd., the only
rating company that maintains an investment-grade rating on
Portuguese debt. That rating gives Portugal access to the European
Central Bank's bond-buying program, which has kept bond yields low
and relatively stable despite recent global market turmoil, a
December bank failure and friction between European Union officials
and the country's new government over its budget plans.
On Friday, DBRS will announce the result of its twice-yearly
review of Portugal. A downgrade to junk status--the rating the
country gets from Standard & Poor's, Moody's Investors Service
and Fitch Ratings--would force it out of the ECB program and raise
borrowing costs for its government, banks and companies.
That, in turn, could reawaken fears over Portugal's future in
the eurozone and the sustainability of the bloc itself, which is
struggling to manage Greece's fiscal troubles. Portugal would be
required to take a new bailout to get a chance to re-enter the ECB
program.
A DBRS downgrade "of course is a concern; it will be a problem
if it happens," Finance Minister Mario Centeno said in an interview
in Washington this month.
Mr. Centeno said he hoped the government's pledges of fiscal
restraint would help avoid a downgrade. In February, DBRS said it
was "comfortable" with the BBB (low) rating and stable outlook it
had given Portugal.
Still, Portugal's reliance on a single ratings firm is widely
viewed as a problem.
"The fact that the country's future in sovereign debt markets
hinges upon a single decision shows that Portugal is still in a
very delicate situation," said Antonio Barroso, an analyst at
political-risk consultancy Teneo Intelligence. "It is also a
reminder for politicians both in Lisbon and in Brussels that they
should be doing more in order to prevent a return of the crisis to
the eurozone."
During its three-year bailout program, which ended in May 2014,
Portugal was considered an exemplary follower of the Germany-led
austerity model. The center-right government at the time, led by
Prime Minister Pedro Passos Coelho, cut public employees' wages,
raised taxes and slashed spending to balance its accounts. The
budget deficit fell sharply, from close to 10% of gross domestic
product in 2010 to 3% of GDP last year, excluding a capital
injection into a failed lender.
Mr. Passos Coelho privatized state companies and changed labor
regulations to bring down labor costs and make exports more
competitive.
Still, Portugal's economy struggles. Exports are rising, but so
are imports. Investments remain scarce. Unemployment exceeds
12%.
The International Monetary Fund predicted recently that
Portugal's economy would grow an average of 1.3% a year over the
next six years, too slowly to reduce a debt burden that stands at
129% of GDP.
Portugal's perception among investors has been hit by two bank
failures since 2014 and the election of a Socialist-led government
that has raised the minimum wage and promised to raise
public-sector wages and lower taxes.
Socialist Prime Minister António Costa, who took office late
last year with the backing of three far-left parties, has softened
his rhetorical attack on his predecessor's austerity measures. He
has agreed to make deeper budget cuts this year to avoid a fight
with the European Commission.
Mr. Centeno, who has traveled to Washington and other capitals
to reassure creditors, last week outlined a plan to cut the deficit
next year to 1.4% of GDP, from a target of 2.2% in 2016.
Even if it manages to avoid a downgrade now, pressure on
Portugal is expected to grow.
DBRS has cited a global economic slowdown, debt sustainability
and a rise in bond yields as factors to watch.
As he cuts the budget, Mr. Costa could be forced to choose
between alienating his far-left allies in parliament or confronting
the European Commission and its fiscal rules.
"The biggest concern that we would have would be [an] open
conflict with the European Commission," Fergus McCormick, head
sovereign analyst at DBRS, said in February.
Tom Fairless in Frankfurt and
Viktoria Dendrinou
in Brussels contributed to this article
Write to Patricia Kowsmann at patricia.kowsmann@wsj.com
(END) Dow Jones Newswires
April 29, 2016 00:44 ET (04:44 GMT)
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