On October 21st the bond rating agency DBRS is to state whether Portugal has hung onto its current, life-saving rating of just over ‘junk’ status.
This has allowed the country to stay in the European Central Bank’s State bond-buying programme without which the cost of borrowing for Portugal would rise steeply.
If the Canadian rating agency downgrades Portugal to junk, which it might well do according to recent mutterings, then the European Central Bank (ECB) funding door will slam shut.
This will affect Portugal’s banks which are dependent on the ECB are likely also to need bailing out, sparking yet another round of volatility across Europe.
DBRS has already warned that Portugal’s economy is stuck in a vicious cycle of slow reforms, low growth, and high debt with the Canadians the only one of four accredited agencies which rates the country’s bond at anything over ‘junk’ status.
Moody’s (Ba1), Fitch (BB+) and Standard & Poor’s (BB+) all take a pessimistic view of Portugal’s economy as yields on Portugal’s 10-year benchmark bonds moving higher over the last month.
Portuguese Secretary of State for Treasury, Ricardo Felix, said he expects DBRS to continue to rate State debt as ‘investment grade.’
“We are pretty confident from the conversations we had with DBRS that the rating will be maintained and the outlook will be maintained,” Felix said in a Bloomberg Television interview, but others are not so sure.
The main problem DBRS now has is in remaining objective. If the agency downgrades Portugal this will have potentially catastrophic consequences for Portugal and across Europe, a scenario that DBRS's anaysts will be well aware of.
Comments
So where does - "confident from the conversations we had with DBRS" come from? Surely Ratings Agencies review published data. If a country is playing games with its declarations - and Portugal does have a known history of doing this - this should be their loss. Otherwise there is the risk that the raters get 'nobbled'.