DBRS, the Canadian agency has warned of the negative consequences of the as yet unresolved argument between the Portuguese government and Brussels.
The agency is said to be the most important rating agency for Portugal and is following closely the dispute between the government and the European Commission over the 2016 State Budget draft.
The disagreement "could put into question the commitment of the Portuguese government to the fiscal rules of the European Union,” reads a statement from Adriana Alvarado, the man at DBRS responsible for monitoring Portugal’s economy.
"DBRS is still looking for a commitment to a credible fiscal plan to support Portugal’s public finances. We are monitoring the development and will assess the government's response to the additional requirements made by the European Commission and any subsequent budgetary pressures that may arise."
DBRS is the only credit rating agency which lists Portugal’s bonds as ‘investment level.’
This may be one level above ‘junk’ status but it is a vital difference as if the rating drops, bonds issued by Portugal will not be accepted as collateral by the European Central Bank for its loans to Portugal’s banks
This means that if the rating was cut, Portugal could be pushed into a new bailout as under European rules the ECB's collateral rules will have been breached.
S&P, Moody's and Fitch do not have the same devastating fire power. DBRS stated that Portugal has a ‘stable outlook’ when it commented last November 13th, but has to re-evaluate the Portuguese rating on April 29th this year.
As for the 2016 State Budget draft, DBRS says the economic growth forecast of 2.1% seems "optimistic" and it has "uncertainty about some of the revenue measures and expenditure controls" so “the deficit target of 2.6% of GDP seems ambitious and may be difficult to achieve."
The credit rating agency also believes that many of the measures proposed by the new government are risky, especially the unspecified spending cuts, the uncertain improvements in the accounts of public enterprises, and the general mood of optimism when everyone else remains gloomy.
If there is a downgrade to ‘junk’ status, the repercussions could be harsh and play into the hands of the Passos Coelho opposition which is waiting for PM António Costa to fail and for a new election to be called.
