Portugal’s excessive government and corporate debt levels, low economic growth and a banking sector whose remaining businesses are showing the strain are all tell-tale signs that all is not well and has ensured debt rating agency DBRS again has Portugal in its spotlight.
The head of sovereign ratings at the credit agency, Fergus McCormick, told Reuters in an interview that pressure is building on the country's creditworthiness, kicking Portugal’s long-term bond yields sharply upwards.
The opinion and rating from DBRS is being monitored with increasing concern by the European Central Bank as it remains the only one of the four recognised agencies that has has given Portugal the investment grade rating the ECB it needs to qualify for the central bank's quantitative easing programme.
Even though the rating is an unimpressive BBB (low) this has kept Portugal’s bonds in the European Central Bank's €1.7 trillion buying programme as 'eligible collateral.'
The next rating from DBRS is scheduled for October 21st and McCormick says the situation is deteriorating.
"Friday's second quarter Gross Domestic Product result (0.2% growth) raised our concerns about growth prospects, which appear to be slowing into the third quarter," said McCormick in the Reuters interview.
The October review is only a few weeks after the European Commission expects to receive a new list of spending cuts from Lisbon which many expect will not hit the mark and therefore expect a year-end deficit in excess of the stipulated 3%.
McCormick is well aware, as are European Commissioners, that huge sums will be needed to refinance Caixa Geral de Depósitos and Millennium BCP as well as clearing up the mess that will be left when bids for Novo Banco fall well below the necessary €4.9 billion.
As concerning as the bill for propping up these businesses, and in the case of Novo Banco, underwriting the losses, is the increasing possibility that the Left Bloc and Communist party will tire of supporting the Socialist government’s increasing need for austerity under Prime Minister, António Costa.
DBRS's commentary on Portugal’s decline is closely being watched because a downgrade to the BBB (low) rating will increase Portugal's borrowing costs and would trigger a significant sell-off of bonds.
On Tuesday (August 16th) Portuguese 10-year bond yields rose 14 points to 2.85% representing the biggest daily rise since June 24th this year when the Brexit result shocked the markets.
