This is a significant development, as it will impinge upon Portugal's prospects for raising finance from the private sector. It does not, however, represent a specifically changed view from the rating agency, nor is it contradictory of our own assessment of the state of Portugal's fiscal position.
Our view essentially remains unchanged from the update we provided in April this year: very cautious, not just on the fixed income market in Portugal but across most of the countries on the southern periphery of Europe, with no exposure to Portugal, Greece or Ireland in our international, global or global aggregate bond strategies.
In response to last night's move from Moody's, the Portuguese authorities have this morning issued a critical press release. They assert that not enough credit has been given to the new fiscal austerity programme nor to the broad political consensus that has been formed behind it. We disagree; we see that Moody's have taken time to assimilate all developments since the recent General Election on 5th June, hence the downgrade represents an update on Moody's views, in light of all of the progress made to date, rather than an abrupt change in the rationale behind their assessment.
The downgrade is chiefly predicated upon the "formidable execution challenge" that is represented by the fiscal programme and not by any ignorance or dissatisfaction with it. Here, we do agree. Portugal has a weak culture of tax compliance, unreformed institutional frameworks, low productivity in the private sector and a large public sector relative to the size of its economy - all features that are similarly shared by Greece, a country that already has had very evident problems in tackling its fiscal imbalances.
Looking ahead, Portugal is financed in the short-term by EU and IMF funding. But, as currently planned, by 2013 it must advance to a position where funding in private debt markets is feasible. In our view, "formidable execution challenge" quite adequately describes the balance of risks in the interim period ahead of 2013. We would expect S&P and Fitch to be updating their appraisals along similar lines in the near future.
|
