May 5, 2010 / 3:42 PM / 10 years ago

UPDATE 3-Moody's says very likely to downgrade Portugal

* Downgrade now highly likely, review to take 3 months

* Still to discuss austerity with government

* Moody’s says may cut Portuguese banks’ ratings (Adds Moody’s statement on banks)

LISBON/NEW YORK, May 5 (Reuters) - Moody’s Investors Service put its credit rating for Portugal on a three-month review on Wednesday, and a senior Moody’s analyst said that as a result a downgrade of the credit rating is now likely.

Moody’s said it could downgrade Portugal’s Aa2 ratings by one, or at most two, notches, citing “the recent deterioration of Portugal’s public finances as well as the economy’s long-term growth challenges,” especially due to low competitiveness.

“We have sent a signal that it is possible, and I have to say, statistically, there is a very strong likelihood that if we put it on a review for downgrade then we follow through with a downgrade,” Anthony Thomas, vice president at Moody’s Sovereign Risk Group, told Reuters.

He said a downgrade was more likely now than when Moody’s first placed Portugal on negative outlook last year.

However, Thomas said the downgrade was not completely certain and Moody’s was planning to meet Portuguese authorities to discuss its austerity programme, including a decision last week to bring forward some measures to this year from 2011.

In January, Thomas said that if Portugal wanted to avoid a downgrade it would have to take meaningful, credible steps to get its deficit under control.

Since then, the government has approved an austerity strategy to slash the budget deficit to 2.8 percent of gross domestic product in 2013 from last year’s 9.4 percent, which includes caps on public sector wages, lower public investment and some new taxes.

Even if Moody’s makes a two-notch rating cut, its rating on Portugal would still be higher than that of Standard & Poor’s, which last week downgraded Portugal by two notches to A-minus, causing a massive sell-off of Portuguese assets.

Portuguese bond spreads jumped again, to 308 basis points, over German Bunds after Moody’s move, but were still lower than last week’s record high of nearly 330 bps.

Moody’s also saw the country’s refinancing risks as modest and said that although Portugal’s financing costs could rise due to market pressure, debt servicing will remain “very affordable in the near to medium term.”

“Although its debt metrics may, on balance, turn out to be more consistent with a low Aa or a high A rating, the government’s debt is neither unsustainable nor unbearable,” it said in a statement.

Separately, Moody’s said it may cut ratings of Portuguese banks, following the review for possible downgrade of the Portuguese government ratings. Moody’s also said it may cut certain Portuguese government-related issuers ratings and may cut ratings of five Portuguese regional and local governments.

“The review of the banks’ debt ratings will assess to what extent a potentially lower-rated government will be able and willing to support its banking system in case of need, especially when bearing in mind the current market headwinds and higher funding costs faced by the Portuguese Government,” said Olga Cerqueira, Assistant Vice President and Moody’s lead analyst for Portuguese banks.

Portugal is one of several European countries whose governments’ borrowing costs have been pushed higher in markets in recent weeks on investors’ concerns about those nations’ high levels of indebtedness.

Meanwhile, Fitch Ratings, which downgraded Portugal to AA-minus in March, said Portuguese structured finance ratings are coming under increasing stress and some may be downgraded.

Fitch rates 24 residential mortgage-backed securities transactions, three asset-backed securities and two small- and medium-sized enterprise collateralized debt obligations, most of which are showing a rise in defaults and arrears, it said. (Reporting by Andrei Khalip; Additional reporting by Ciara Linnane and John Parry in New York; Editing by James Dalgleish)

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