UPDATE 2-Portugal deficit disappoints, Fitch warns on downgrade
By Andrei Khalip
LISBON, Jan 27 (Reuters) - A downgrade for Portugal's credit rating is
"more likely than not" after its 2009 budget deficit was worse than expected,
Fitch Ratings said on Wednesday, prompting the government to ask ratings
agencies not to rush to judgement on any downgrade decisions.
With European financial markets weighed down by worries over how Greece
can dig itself out of a funding crisis, investors are eyeing Portugal and the
euro zone's other heavily-indebted peripheral countries for signs of whether
they could be next.
Douglas Renwick, associate director with Fitch Ratings told Reuters on
Wednesday the agency maintains a negative outlook on the country's credit
ratings after the government put its 2009 deficit estimate at 9.3 percent of
gross domestic product.
Previous government estimates put the fiscal gap at around 8 percent.
The draft 2010 budget envisages a 1 percentage point cut in the 2010 deficit to
8.3 percent of GDP.
The draft budget projects economic growth of 0.7 percent this year after
an expected 2.6 percent contraction in 2009.
The premium investors demand on holding Portuguese bonds over German
bunds widened 12 points on the day to 105 bps.
"The first thing that struck us was the upward revision of last year's
deficit, which was quite disappointing. 9.3 percent of GDP is significant,"
Renwick said.
"That's 3 points more that when we first put Portugal on negative
outlook in September ... Certainly negative outlook remains, which implies a
downgrade is more likely than not."
Finance Minister Fernando Teixeira dos Santos said ratings agencies had
to give the government some breathing space.
"I wait and hope that when taking their decision the ratings agencies
evaluate the government's measures ... we deserve some benefit of the doubt
regarding deficit reduction," he said.
Fitch rates Portugal's debt at AA, or third-highest investment grade.
Moody's ratings agency changed Portugal's risk outlook to negative from stable
last October, while Standard & Poor's put Portugal on negative watch in
December.
A ratings downgrade would entail higher borrowing costs and complicate
any recovery in Portugal -- whose economy suffers from low competitiveness and
is one of the euro zone's weakest.
Government officials also said Portugal was preparing a debut retail
bond for the general public to reinforce savings, which some in the market see
as an attempt to borrow at home when yields abroad are too high. Debt-to-GDP
ratio is seen rising this year to 85.4 percent from 76.6 percent in 2009.
SOME POSITIVE SIGNS
Renwick did say it was good to see that Portugal had recognised the need
for a consolidation, even if it is not the most aggressive, and he singled out
a freeze on public sector wages in 2010 as a good sign.
He was also encouraged that the largest opposition party in parliament,
the Social Democrats, had agreed to abstain from voting on the budget, which
will allow the ruling Socialists to pass it with a simple majority.
Ralph Solveen, an analyst with Commerzbank in Frankfurt said the
"magnitude of last year's deficit rise was a surprise", while the planned
budget consolidation was "hardly ambitious".
"Still, I'd say the general impression is positive. It's not a big step,
but they are trying to reduce deficit ... The cut is certainly more realistic
to achieve than in Greece, but we still have to analyse the spending and
revenue parts," he said.
Although the Portuguese plan may lack ambition, Fitch's Renwick said
that comparisons with Greece, which seeks to lop 4 points off its 12.7 deficit
this year, were "unfair".
"The need for consolidation is more urgent in Greece and generally
Portugal has a better track record in reducing its deficit ... We have to see
what they say in their stability programme about longer-term consolidation," he
added.
Prime Minister Jose Socrates told reporters his government has in the
past done "deficit-reducing exercise and knows how to do it", so the only big
risk was global economic recovery failing to continue.
The Socialist government has earlier managed to cut budget deficit from
2005's 6.1 percent to below the euro zone threshold of 3 percent in 2007, where
it also remained in 2008. Portugal has to come back to within that limit in
2013.
For budget FACTBOX, click, for analysis on Portugal's debt, click
(Additional reporting by Shrikesh Laxmidas, Sergio Goncalves; Editing by
Toby Chopra) Keywords: PORTUGAL/BUDGET
(andrei.khalip@thomsonreuters.com; (351) 213-509-209; RM:
andrei.khalip.reuters.com@reuters.net)
2010-01-27 15:28:47
3N|BND ECO|POR GRC||
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