(Source: Info-Prod Research (Middle East))Moody's Investors Service has today changed theoutlook on the government of Portugal's Aa2 ratings to negative fromstable. The rating action reflects both the structural economicchallenges facing the country, which have been exacerbated by the globalcrisis, and the apparent lack of motivation for policymakers to addressthem. Moody's notes that Portugal falls under the Eurozone's Aaa regionalceiling, for which the outlook remains stable. Although the direct impact of the global crisis has largely bypassedPortugal, so that its growth performance and the deterioration in thegovernment's fiscal metrics this year have been in line with or evenbetter than those of its Eurozone peers, Moody's cautions that subduedglobal growth following the crisis will lead to seriously adverse debtdynamics for Portugal. "The problem seems to be that there is no spur to action for thegovernment. The obvious one, a currency crisis, can no longer happenbecause Portugal is in the Eurozone. Large external deficits are not aproblem per se as they can be financed easily within the EMU," explainsAnthony Thomas, a Vice President in Moody's Sovereign Risk Group. Moody's says that the most likely outcome for Portugal is a slow butinexorable decline, where growth remains sluggish, thereby stallingincomes, and where debt continues to build over time. Indeed, Moody'smain concern is slow growth potential, which the rating agency attributesto the unwillingness of successive governments to take steps to restorecompetitiveness. The competitiveness gap is also generally seen as thecause of Portugal's large current-account deficits. Should this situationcontinue, the trend growth rate in the economy is likely to remainrelatively low, thereby limiting the government's ability to 'grow' outof its debt problems even when the post-crisis recovery gets underway. "As a result, the burden of improving Portugal's debt metrics will falldisproportionately on fiscal retrenchment. On this score, Portugal'shistorical performance is not encouraging," adds Mr. Thomas. In the first decade of the single currency union, Moody's notes thatPortugal's budget failed to meet the Growth and Stability Pact criteriamultiple times and the authorities relied heavily on one-off measures.When the budget fell below the Pact's 3% ceiling, efforts were not madeto move it upwards. "The general government debt-to-GDP ratio has been on a broad upward trend since the start of the EMU and debt affordability (as measured bythe ratio of interest payments to revenues) has been deteriorating forfive years despite the Pact's strictures and low interest rates," notesMr. Thomas. Moody's will monitor the situation closely in the coming months to seewhether meaningful reforms are finally taken to tackle the underlyingproblems in the economy and the public finances. With the governmenthaving lost its majority in the recent national election, such an effortseems unlikely and the rating could be placed on review for downgrade.Conversely, if active measures are adopted with broad consensus, therating outlook could ultimately be changed back to stable. It should be noted that Moody's also placed the Greek government's A1ratings on review for possible downgrade today, citing similar concernsto those it expresses about Portugal, such as the country's growth modeland the inability of successive governments to rein in budget deficits.

Originally published by Info-Prod Strategic Business Information.

(c) 2009 Info-Prod Research (Middle East). Provided by ProQuest LLC. All rights Reserved.

A service of YellowBrix, Inc.