Moody's has threatened to cut its credit rating for Novo Banco due to "major challenges" identified as a result of a poor performance in the recent European Central Bank stress test, the main one being a lack of capital.
The final decision will be taken after reviewing the plans to be submitted by Stock da Cunha, Novo Banco’s Chief Executive, who needs to rake in €1.4 billion from asset sales.
"Moody's believes that Novo Banco faces serious challenges to meet its needs from internal sources, and gives it a very weak credit profile."
The ratings agency does not believe that the restructuring plan announced by the bank will raise the capital needed and that it will need money from outside investors, the main candidates being the banks that already have rescued Novo Banco by injecting money into the Resolution Fund.
The Bank of Portugal imagines that private investors will be keen to put money into Novo Banco, despite its ‘unquantifiable liabilities’ noted by auditors PWC.
Moody’s therefore does not recommend that anyone invests in Novo Banco as its rating may well fall from the current B2 which already is carries an investment warning tag.
Two further factors are the banks lack of profitability, and its lack of access to funding on the open market.
Portuguese bonds are faring little better as yields are near a four-month high just before a crucial review that could lead to Portugal being ejected from the European Central Bank's asset-purchase programme.
Other eurozone bond yields are falling as easing commodity prices are fuelling the expectations of a period of low inflation and further ‘quantitative easing’ by the European Central bank in December.
In Portugal the market has been waiting for a review by the Canadian ratings agency DBRS due out on Friday. A downgrade is expected due to the current political impasse in Portugal and if it happens, Portugal would be deprived of its last investment-grade rating, leaving its debt ineligible for purchase under the quantitative easing programme.
