Portugal Cut to Baa1 From A3 by Moody’s on Bailout View (1)

By Emma Ross-Thomas and Simone Meier
April 5 (Bloomberg) -- Portugal’s credit rating was cut by Moody’s Investors Service for the second time in three weeks amid expectations it will be unable to avert a European bailout.
Moody’s downgraded Portugal’s long-term government bond ratings by one level to Baa1 from A3, and said it’s considering another cut. Today’s move put the country at the same level as Ireland, Russia, Mexico and Thailand. Fitch Ratings on April 1 downgraded Portugal three notches to BBB-, the lowest investment grade, and maintained the “rating watch negative.”
“Moody’s rating action was driven primarily by increased political, budgetary and economic uncertainty,” the company said in an e-mailed statement today. It expects the winner of June 5 elections to tap the European Financial Stability Facility with “urgency,” and that Portugal will be able to get support from other euro members before then if necessary.
Investors are increasing bets Portugal will follow Greece and Ireland into seeking a rescue as its borrowing costs surge to record highs. Socialist Prime Minister Jose Socrates resigned last month after Parliament rejected his austerity measures needed to tackle the deficit.
“Portugal still has an investment-grade rating with Moody’s, but it will become a big deal once it loses that status because those who don’t have a mandate to hold sub-investment- grade bonds will be forced to sell,” said Pavan Wadhwa, head of global interest-rate strategy at JPMorgan Chase & Co. in London.
“It’s just the matter of time before Portugal will have to seek external aid.”

Redemptions

The vote will be held between two bond redemptions, on April 15 and June 15. The maturities total 9 billion euros ($13 billion).
Socrates repeated yesterday that he will avoid requesting external aid. The gap between Portuguese and German 10-year bonds surged to 522 basis points, the highest closing level since the start of the euro. The yield on five-year notes has climbed to 9.92 percent.
Credit-default swaps on Portugal traded at 569 yesterday, according to CMA. That implies a 39.5 percent probability the government will default on its debt within five years.
The country can meet “debt redemption commitments scheduled for 2011, especially the redemptions of long-term debt that will take place in April and June,” Secretary of State for Treasury and Finance Carlos Costa Pina said last week. He said the vote could calm markets.
“The cost of financing was substantially worsened by the political crisis triggered by the opposition,” he said. “A clarification of the political situation is urgent.”

‘Unsustainable’ Level

Opinion polls suggest that Socrates, who leads the Socialists, will lose the election. The Social Democrats led the Socialists by 37.3 percent to 30.4 percent in a survey of voters published on April 1 on the website of newspaper Expresso.
Socrates became prime minister in 2005 and his Socialist Party won re-election in 2009 without a majority. The Social Democrats agreed in October to let his 2011 budget pass by abstaining. Their opposition to the new austerity measures announced on March 11, which included a reduction in some pensions and cuts in tax benefits, toppled Socrates.
President Anibal Cavaco Silva said on March 28 that the three biggest political parties pledged their commitment to meet current deficit targets and bring the shortfall to the European Union’s 3 percent limit of gross domestic product in 2012. The country reported a shortfall of 8.6 percent of GDP for 2010.
“The government’s current cost of funding is nearing a level that is unsustainable,” Moody’s said. “It is very unlikely that the long-term debt markets will reopen to the Portuguese government or the Portuguese banks to any meaningful extent until the government is able to take action to dispel doubts over its commitment and ability to implement the fiscal program.”