LISBON: Portuguese government borrowing costs held near one-month lows on Friday, showing little sign of stress as the first of a number of back-to-back tests for its credit rating approached. Lisbon’s bonds have recovered after a sharp sell-off in mid-February, boosted partly by an improving outlook for growth in the world’s largest economy, the United States.
U.S. jobs data due later on Friday is expected to confirm a solid trend. Investors are also relieved that Portugal’s new Socialist government tightened its budget plan last month after pressure from the European Commission, but uncertainty remains over whether more cost-cutting will be needed to reduce its deficit.
Fitch is the first of three agencies to assess Portugal’s rating over the coming two months, building up to a ruling from DBRS which could junk Lisbon in a move that would make its bonds no longer eligible for the ECB’s asset-purchase programme.
“While (Fitch’s) rating action would not be overly significant in itself, we see the risk that investors will make inferences…for the crucial review from DBRS,” said Commerzbank strategist David Schnautz.
“Overall, we hold on to our cautious stance in PGBs (Portuguese government bonds).” Fitch rates Portugal at BB+, one notch below investment grade, with a positive outlook. But it warned in January that the country’s anti-austerity budget may be unrealistic and could lead to weaker growth and a rating cut. Analysts expect Fitch to remove its positive outlook, with a chance it switches to a negative outlook.
This would not bode well for a review from Standard and Poor’s on March 18, and crucially for a review from DBRS on April 29, the only one of four agencies recognised by the ECB that has an investment grade rating for Portugal, which must have one such rating to qualify for quantitative-easing buying.
Last month DBRS said it was comfortable with its BBB (low) ‘stable’ rating for Portugal but raised concern about a rout in its bonds that sent yields near a two-year high of 4.38 percent on Feb. 11.
DBRS said the rise in yields — partly sparked by investor concerns about its budget plan — could become a problem given Lisbon’s high refinancing burden. Around a third of Portugal’s 148 billion euros of outstanding debt falls due over the next three years.
Portugal’s 10-year yields were up 2 basis points at 2.89 percent on Friday, while most other euro zone equivalents were a touch lower. But they remained within touching distance of a four-week low of 2.85 percent hit a few days ago.
DZ Bank analyst Martin van Vliet said signs from DBRS that it is comfortable with its rating should ease market nerves for now, barring any “unforeseen circumstances”.
The fourth agency whose rating is recognised by the ECB, Moody’s, skipped a review of Portugal’s junk Ba1 rating on Jan. 15. It said this week that Lisbon still needs significant fiscal consolidation to reduce its large debts, and its banking system is not strong enough to support economic recovery.
