Moody’s: New terms of Portuguese bailout are credit positive


The rating agency said the decision to ease the terms of the fiscal consolidation programme for the next three years will reduce the drag on growth. But Moody’s casts doubts on the country’s ability to reach its new targets without further austerity measures.

Economy Politics What's New — 17 September 2012 by Blandina Costa
Moody’s: New terms of Portuguese bailout are credit positive

The decision to ease the terms of Portugal’s fiscal consolidation programme for the next three years is credit positive Moody’s Investors Service said Monday.

The revisions are credit positive because they will keep financial support flowing while reducing the drag on growth from budget tightening on an already-weak economy,” Moody’s said in a regular credit outlook.

In its fifth quarterly review the so-called troika of international lenders – European Commission, European Central Bank and International Monetary Fund – gave the country the widely claimed extra-time to reach its deficit goals. The new targets say Portugal will have to reach a budget deficit of 5% of gross domestic product in 2012, instead of the previous 4.5%. For the following year the goal was revised to 4.5%, against the initial 3%, and for 2014 the new goal was set at 2.5% from the previous 2.3%.

However, the rating agency casted doubts on the country’s ability to reach its new targets without further austerity measures.

Portugal’s economic and fiscal adjustment remains highly challenging and fraught with downside risks” wrote Moody’s.

On the new measures recently announced by Prime Minister Pedro Passos Coelho – which aim to increase employee social security contributions from 11% to 18%, while company contributions would drop from just under 24% to the same level – the credit rating agency highlighted the lack of consensus between the government and the main opposition Socialist Party. But Moody’s also “expect that intense negotiations to take place over the next few weeks will reach a broad budget agreement and avert another political crisis.”

Moody’s report did not take into account the weekend’s developments regarding the divergence between the two political parties that form the coalition government.

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Blandina Costa

(10) Readers Comments

  1. Portugal is the EU lab rat, used as proving grounds for whatever misconceived agenda’s the shadowy leaders somewhere up in the North have concocted, meanwhile, the Portuguese continue to reap a harvest of unemployment and misery. OUT OF THE EU NOW!

  2. And you think life will be better once PT is out of the EU?
    You’re dreaming.

  3. Absolute bollocks. Portugal through persistent political and administrative ineptitude, corruption and self interest has been the architect of it’s own demise. I don’t recall any Portuguese bleating about leaving the EU in the good old days when northern European taxpayers money was being shovelled south and equally quickly into the pockets of various political figures and their sidekicks. I agree that most ordinary Portuguese aren’t directly responsible for the mess the country is in but almost all are involved in tax evasion and either receiving or giving brown envelopes to “grease the wheels”. The perpetuation of the culture of nepotism and special interest together with a wilful (and acknowledged by most Portuguese I speak to) apathy towards cleaning up the system has led to the current situation. Leaving the EU would cut off the remaining aid given and send the currency into freefall whilst at the same time being locked out of European markets by new import taxes to the EU block plus large numbers of Portuguese currently working in other EU countries might suddenly find the welcome mat revoked and return to place a further burden on the country. Leaving the EU isn’t the answer. Cleaning up dodgy practices in all sectors and learning to live within your means would do the country far better service in the longer term – short term pain, long term gain. Or quit whining and take your medicine. Incidentally the current round of austerity has been implemented by Peter Rabbit and his rabble of farm animals not the troika who are taking a somewhat more relaxed approach to Portugal so once again Portugal’s problems are being designed and built at home. Presumably though the electorate will vote in another tax and spend Socialist block toreplace the current selection of muppets who will undoubtedly run the country properly into bankruptcy now that no one else has got the money to lend.

  4. Yes Lab Rats, you read it right, Woodgate! The EU has an obligation to member states to prevent public unrest due to avoidable economic collapse brought on by the fact that Portugal cannot devalue its currency, the one trump card that all nations have used in the past. And the fact that it cannot access bond markets due to exorbitant rates brought on by the Credit Agency duplicity. And YES! the introduction of the EURO is the single biggest reason for the collapse of the Portuguese economy. An economy that was growing at between 3 – 6 % during the 1990′s pre-EURO. As for the North carrying the Portuguese economy, that is the biggest load of ‘bullocks’ ever seated. Most of that so called free money as you intone are and were loans, which is why Portugal is in this mess in the first place and it has been attempting to pay these loans ever since. Low interest loans that encouraged previous administrations to spend like there was no tomorrow, much of that spending went into purchasing Northern European goods and services. In the meantime, with the introduction of Eastern bloc nations, which should have had a major rethink, went ahead unchallenged, Portugal’s competitive edge tanked, with jobs leaving Portugal em masse. Industries that had existed for decades, packing up and leaving. With the EURO, the cost of living virtually quadrupled for ordinary citizens who are now paying elevated rates for goods and services that were a fraction of the cost pre-Euro, but wages frozen in Pre-EURO. There has been no advantage to Portugal, except perhaps the corrupt puppets who have been ruining this country, at least on that you and I both agree. One last thing, considering you use much British verbiage, I will presume you are somehow connected, I suggest you take a look at your own dodgy mismanagement of public monies, your external debt is sincerely beyond belief, and your trade imbalance suggests a country on a serious decline. Britain a place that does not deserve the triple A that somehow has eluded the credit agencies scrutiny.

  5. Yes Carola, better, much much better. More competitive, less prone to entanglement of external forces. More capable of readjustment. Better positioned to attract foreign investment. More capable in attracting tourism, more capable in competing for contracts externally. Better control of the trail of money. Better bargaining in terms of geo-politics. Regained access to self-improvement, with the actualization of regaining its farming industry. More control of its fisheries. And Lastly more apt to control public spending. Once the initial 3 – 5 years of transition from the EURO to the Escudo has subsided, Portugal will be in a much better position to forge new ties with other nations external to the EU. The current EU plan is for Portugal to continue to wallow in misery until 2030, if this is what you consider better, than it is you, not I, who is dreaming.

  6. I wish you and Portugal the best of the two options.
    And maybe I should wait by investing my money into property in Lisbon until just before your dream materializes.
    Without any doubt the housing market, along with others, would collapse.
    And it would be stupid not to take advantage of it.
    And I even might have a few Escudos somewhere…..

  7. Really Carola? Cheaper homes will attract investors not the other way around, that should be easy enough to see. Currently, Portugal’s housing market is priced on the high end, and this is once again mainly due to the EURO. The Escudo, would in fact reduce the cost of homes, and therefore increase foreign investment. Perhaps you might live the dream faster than you already seem to be.

  8. As an addendum to previous comment, with higher foreign and local investment, Portuguese real-estate would see a resurgence and help the boost economic activity. This is only possible outside of the EURO, currently, since most Portuguese do not earn enough to purchase their own homes, once again, we can thank the EURO for this. And yes Carola, it would be extremely stupid not to take advantage of it.

  9. The Lisbon Treaty’s TEU Article 50, empowers nations to leave the EU voluntarily.

    Article 50

    1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.

    2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

    3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

    4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it.

    A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union.

    5. If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to the procedure referred to in Article 49.

  10. here are some numbers that show that with the Introduction of the EURO, Portugal’s trade has become incredibly imbalanced.

    Portugal’s Main Trading Partners 1986 – 2011

    Portugal’s Clients in 1986 as a percentage:

    France: 15.2%
    Germany: 14.7%
    U.K: 14.2%
    USA: 7%
    Netherlands: 6.7%
    Spain: 6.6%
    Others: 35.6%

    Portugal’s Clients in 2011 as a percentage:

    France: 12%
    Germany: 13.6%
    U.K: 5.1%
    USA: 5.5%
    Netherlands: 3.9%
    Spain: 24.8%
    Others: 35.1%

    As can be plainly seen, Spain’s prominence as a major trading partner has left Portugal vulnerable and deeply (too deeply) at the mercy of economic situation in Spain. Meanwhile, sales to the other EU states have either stagnated or declined. In the Case of the U.K, that decline has be severe. Notice that trade with Germany has also declined as an overall percentage. Outside of Spain, the introduction of the EU has made Portuguese products less attractive, this is undoubtedly due to the higher cost of Portuguese products as well as the loss of industry due to exodus of many of Portugal’s industry, such as clothing, shoes, produce etc.

    Portugal’s Suppliers in 1986 as a percentage:

    France: 10.6%
    Germany: 14.4%
    U.K: 7.5%
    USA: 7.9%
    Netherlands: 7.5%
    Spain: 10.9%
    Others: 41.7%

    Portugal’s Suppliers in 2011 as a percentage:

    France: 6.9%
    Germany: 12.4%
    U.K: 3.3%
    Italy: 5.4%
    Netherlands: 4.8%
    Spain: 31.6%
    Others: 35.6%

    As can be seen, Portugal’s reliance on Spain is worrisome. Pre-Euro, Portugal’s trade was much more diverse in 1986 pre-EURO than it is today. What is also concerning is Portugal’s loss of trade with the U.K, which up until the EURO, was very strong. And trade with other European nations has become weaker not stronger.

    The saving grace for Portugal is its retrending of trade with non-EU countries like Angola, China, Brazil and others in the Americas. The EURO has left Portugal vulnerable and over-dependent on Spain, which is consequently Portugal’s largest trade deficit too. It has also had the opposite affect than what was being sold by Portuguese politicos, lower percentage of trading with other EU countries and an over-dependance on its neighbor Spain. It is clear that the EURO has completely disrupted Portugal’s trade.