UBS says Portugal’s rating is not at imminent risk of being cut by DBRS. However, it could come under pressure due to weak growth or for not implementing economic policies.
UBS says Portugal’s rating is not at imminent risk of being cut by DBRS, the agency due to review Portugal on October 21st. If Portugal complies with the Commission’s fiscal adjustments, the bank believes Portugal will be able to keep its financial rating – which is what is maintaining the country eligible for the ECB’s purchase programme.
Is DBRS about to cut Portugal’s rating? We do not think that is the case. However, in terms of rating perspectives, Portugal is still not out of the danger zone
UBS explains: “Portugal’s credit credibility should not be propelled by a strong growth over the next trimesters or years”. The bank adds that weak growth, insufficient fiscal consolidation on the Commission’s demands, vulnerable debt dynamics and concerns about financial stability “should not carry out a positive rating action”.
UBS also mentions Portuguese sovereign bonds do not offer an attractive risk/reward balance: “Portuguese sovereign bonds offer high return in a universe of weak growth, low inflation and extremely low interest rates”. Ten-year bond yields have been rising since August and are now at around 3.5%, but UBS “is still not tempted”.
UBS points out that recovery based on consumption and export performance have been decreasing, adding, nonetheless, “Government’s projections for the debt-to-GDP ratio are optimistic”.
On the other hand, the stability of the financial sector is still fragile. After months of negotiations with the European Commission, an agreement in principle was reached concerning a 5.2 billion recapitalization plan for Caixa Geral de Depósitos.