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S and P review no help to Portugal

Friday, January 17 14:25:47

Standard and Poor's decided against downgrading Portugal's credit rating on Friday but kept a negative outlook on the country's finances as it approaches the end of its EU/IMF bailout this year.

It said a key risk was the possibility the Constitutional Court may reject more attempts to reduce budget costs after previously ruling out some spending cuts, including an average 10 percent reduction in public sector pensions.

The rating agency's decision to remove Portugal from Creditwatch negative represents a slight improvement in its outlook on the BB rating, which is two notches into junk territory, as Lisbon emerges from a prolonged recession.

Speaking in parliament, Prime Minister Pedro Passos Coelho called the decision "good news" for Portugal, along with a recent slide in sovereign debt yields, which he said showed growing confidence in Lisbon's fiscal and economic performance.

But the S and P decision is already mostly priced into Portuguese bonds following a recent rally and some players showed disappointment that the outlook had not been moved to stable.

Another rating agency, Moody's, raised the outlook on its rating for Portugal to stable from negative in November, the first positive action on Portugal by any of the three big rating firms since a political crisis in the summer of 2013.

Moody's rates Portugal Ba3, three notches below investment grade. Fitch rates Portugal just one notch into junk territory at BB+ with a negative outlook.

The yield on Portugal's benchmark 10-year bonds dropped to 5.13 percent today from Thursday's settlement level of 5.166 percent, but stayed above Thursday's 3-1/2 year intraday lows of 5.07 percent.

S and P said the move reflects its expectation that Portugal will achieve its 5.5 percent of GDP budget deficit target in 2013 and approach its 4.0 percent target in 2014, based on signs of economic stabilisation since mid-2013, stronger-than-expected export performance, and a modest decline in unemployment.

However, the leftist opposition has challenged public sector wage cuts and several other measures worth a total of some 1 billion euros, which is about one-fourth of this year's austerity package. The constitutional court is due to deliver a decision in the coming months.

S and P said it expected the government to find alternative measures to any possible rejection as it has done in the past, but nevertheless cited possible slippage in the primary fiscal balance among risk factors, along with lower-than-expected growth and potential political instability over austerity. (Reuters)