If S&P Didn't Downgrade Portugal... Is That An Implied Upgrade?

We have noted over and over, “Expect more downgrades in the lands of the PIIGS from the ratings agencies!”  That means S&P, Moody’s, and Fitch.  But what about a day that Standard & Poor’s “affirms” Portugal’s long-term and short-term sovereign credit ratings?  That is today.  For a nation under the PIIGS to not get a downgrade when a credit rating report is issued, it almost feels like a miracle.

Standard & Poor’s has affirmed the long-term and short-term sovereign credit ratings issued under the Republic of Portugal as ‘BBB-‘ long-term and ‘A-3’ short-term. It cannot be a surprise that the “Negative” outlook remains after all of the negative press out of Europe, but still… No downgrade.  The ‘AAA’ transfer and convertibility assessment is unchanged.

S&P noted that Portugal is strongly committed to living within the EU/IMF program and it believes that the government “should achieve something close to the EU/IMF program’s fiscal targets by implementing additional austerity measures to partially offset any fiscal slippage.”

What makes the lack of a downgrade more interesting is that S&P said there is still a belief that Portugal will see an economic contraction that is more severe in the near-term because of weak external demand and also due to tighter credit conditions.

S&P expects that Portugal’s net general government debt should peak at 106% of GDP out in the year 2013, but S&P also expects “continued funding support” from multilateral lenders.  The “Negative” outlook remains as it reflects implementation risks tied to the EU/IMF program.

It feels amazing that there was no downgrade.  When was the last time anyone remembers any good news from Portugal, Italy, Ireland, Greece, or Spain? Downgrading the PIIGS has become close to the international sport of credit ratings agencies and it has quite frankly started to feel like the new normal. 

Our own interpretation is that the ‘Negative’ outlook allows for action later and it implies that a downgrade could easily come about if things deteriorate or if the local politicos cannot stand up to the citizens to live up to commitments.  Still, S&P noted in this reaffirmation that it already expects “an economic contraction that is more severe in the near-term” and it did not downgrade Portugal.

This is one of those instances where not-bad news may be deemed good news.  Unfortunately, the news elsewhere is not so good.

JON C. OGG