A suspension of bond purchases by the ECB in the event of downgrade would be huge risk to outlook. Ratings agency DBRS is due to issue an update of its rating for Portugal on Friday, 21 October. Among the four rating agencies used by the ECB, only DBRS still has an investment-grade rating for Portuguese sovereign bonds (OTs). Even a one-notch downgrade by DRBS would push its rating of Portugal down to speculative status, and would effectively render Portuguese sovereign bonds ineligible for ECB bond purchases. Indeed, the risk of a ratings downgrade has put Portugal’s bonds under increasing pressure and they have significantly underperformed Italian and Spanish bonds since mid-2015.But, on balance, we think Portugal should avoid both a European Commission veto of its 2017 budget and a ratings downgrade by DBRS on Friday. Our relatively constructive view for the next few months is based on the recent budgetary measures unveiled by the coalition government, notwithstanding a few concessions to the far left. These measures should allow the ECB to continue its purchases of Portuguese debt for the time being. However, the medium-term outlook for Portugal’s economic growth, debt sustainability and political stability is much more challenging.The deficit targets of 2.4% of GDP for 2016 and 1.6% for 2017 (down from 4.
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Frederik Ducrozet and Nadia Gharbi considers the following as important: Macroview, Portugal deficit, Portugal rating, Portuguese banks, Portuguese bonds
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A suspension of bond purchases by the ECB in the event of downgrade would be huge risk to outlook.
Ratings agency DBRS is due to issue an update of its rating for Portugal on Friday, 21 October. Among the four rating agencies used by the ECB, only DBRS still has an investment-grade rating for Portuguese sovereign bonds (OTs). Even a one-notch downgrade by DRBS would push its rating of Portugal down to speculative status, and would effectively render Portuguese sovereign bonds ineligible for ECB bond purchases. Indeed, the risk of a ratings downgrade has put Portugal’s bonds under increasing pressure and they have significantly underperformed Italian and Spanish bonds since mid-2015.
But, on balance, we think Portugal should avoid both a European Commission veto of its 2017 budget and a ratings downgrade by DBRS on Friday. Our relatively constructive view for the next few months is based on the recent budgetary measures unveiled by the coalition government, notwithstanding a few concessions to the far left. These measures should allow the ECB to continue its purchases of Portuguese debt for the time being. However, the medium-term outlook for Portugal’s economic growth, debt sustainability and political stability is much more challenging.
The deficit targets of 2.4% of GDP for 2016 and 1.6% for 2017 (down from 4.4% in 2015) look very ambitious and can only be met with strong GDP growth. The government expects the economy to grow by 1.5% in 2017, accelerating from an estimated 1.2% this year.
The health of the Portuguese banking sector, overloaded with non-performing loans, is another concern. All in all, the cumulative risks to the sustainability of (public and private) debt leaves the Portuguese economy vulnerable to external shocks for the foreseeable future, making Portugal another ‘weak link’ in the macro outlook for the euro area along with Italy.
At this stage, however, we believe DBRS is more likely to lower the outlook on the sovereign rate from stable to negative rather than downgrade the actual rating. Thus, the risk of exclusion from the ECB’s quantitative easing programme appears fairly low. Nevertheless, the Portuguese situation remains fragile.