(The following statement was released by the rating agency)
Jan 25 - Portugal's return to the market with a EUR2.5bn
five-year international bond is positive for its credit profile, but significant
economic and political risks remain, Fitch Ratings says.
The deal completes a third stage in Portugal's preparation for regaining full
market access, in terms of being able to meet all its fiscal funding needs in
the bond or bill market by regularly issuing in a range of maturities. The first
was increasing the size and maturity of its Treasury bill issue, which it did in
April 2012. The second was an exchange to extend some bond maturities, which
happened in September. There is a clear positive momentum, with 10-year yields
at their lowest level in over two years. However we believe it remains
challenging for Portugal to regain full market access because of large funding
needs and the continuing high risk premium at the long end of the yield curve,
which implies an unsustainably high cost of funding.
Our base case remains that Portugal will not gain full market access by the time
the IMF-EU programme expires and, therefore, additional funding support and a
new programme will be needed. Wednesday's bond issuance raises the possibility
that Portugal will be supported through the ECB's Outright Monetary Transactions
(OMT) once full market access is restored, although it remains unclear under
what conditions the OMT would be deployed. EU Economic and Monetary Affairs
Commissioner Olli Rehn said Tuesday that OMT purchases could be used to support
Portugal's access to market funding alongside a precautionary programme. The ECB
itself said in September that "a necessary condition" for OMT purchases is
"strict and effective conditionality attached to an appropriate European
Financial Stability/European Stability Mechanism programme."
The fall in Portuguese bond yields and successful bond issuance suggest that one
of the positive rating triggers identified in our November review - a moderation
of the eurozone crisis - is having a positive effect on Portugal's fiscal
The Portuguese economy still faces several challenges. The weak economic outlook
is complicating the government's deficit reduction plan and Portugal is only
part way through its adjustment. A large effort is still required to achieve
sustainable public finances in the medium term.
To achieve this would involve additional fiscal measures, including cuts to
government spending. Cross-party commitment to the programme is therefore likely
to be tested further. Moreover, institutional constraints could limit the
government's room for manoeuvre. Political risk remains significant.
Increased political uncertainty or material slippage in fiscal consolidation
could put negative pressure on the ratings. Weaker-than-expected GDP growth,
leading to a significantly higher peak in public debt, would also be a trigger
for negative rating action. It could also dent investor sentiment towards
Portuguese government debt. Further evidence that the internal adjustment is
working as planned, with continued reduction in the current and fiscal deficits,
would lead to the Outlook being revised to Stable from Negative. We affirmed
Portugal's 'BB+' rating on 12 November.