UPDATE 2-ECB's Costa says Portugal needs consensus, S&P cuts outlook

Fri Jul 5, 2013 1:19pm EDT

Related Topics

* Central bank head calls for political consensus

* Says coalition rift threatens exit from aid programme

* S&P cuts outlook to negative, cites uncertainty

By Daniel Alvarenga and Sergio Goncalves

LISBON, July 5 (Reuters) - European Central Bank Governing Council member Carlos Costa on Friday warned Portugal needs to overcome a political rift which could undermine its fiscal adjustment and which Standard & Poor's said could hit the country's debt rating.

Ratings agency Standard & Poor's revised down Lisbon's sovereign credit outlook late on Friday, changing the outlook to negative from stable. Its BB rating for Portugal is still in junk territory.

A political crisis in the ruling coalition following the resignations of the foreign and finance ministers this week threatens to upset progress of Lisbon's programme under its 78-billion-euro bailout from the European Union and IMF.

"This week's ministerial resignations complicate Portugal's already-challenging policymaking environment," S&P said, adding that the uncertainty could damage the country's plans to exit the programme in 2014.

"The negative outlook reflects our view that there is now a more than a one-in-three chance that we could downgrade Portugal within the next 12 months," the rating agency said.

Fitch ratings agency said on Thursday said that prolonged political uncertainty could pressure its BB+ rating for Portugal.

ECB's Costa, who is also governor of the Bank of Portugal, said earlier that Portugal adjustment's programme had been "executed in a rigorous way".

"Yet there is in the population and (among) political agents a feeling of failure, that we missed the targets," he told a conference. "Besides social cohesion, there are important conditions, the first is political consensus," Costa said.

He added that the Portuguese economy, which is in its worst slump since the 1970s, could return to slight growth next year after three years of contraction.

Prime Minister Pedro Passos Coelho said on Thursday he had found a way to maintain a stable government with the junior CDS-PP partner in the ruling coalition. But a deal still needs to be firmed up and then approved by President Anibal Cavaco Silva.

The premier and Portas held a fourth round of talks on Friday afternoon, local media reported. The president is set to meet heads of the political parties to help resolve the crisis on Monday and Tuesday.

Cavaco Silva told a conference that a negative scenario for the country would be a failure to return to markets as planned in 2014, which could happen due to internal politics or external events.

The returns investors demand to hold Portugal's 10-year bonds, which topped 8 percent earlier this week, fell about 33 basis points to 7.18 percent on Friday as the country tried to resolve the crisis.

FILED UNDER: