April 2010
Markets flash Portugal Downgrade As seen by the Fixed Income department An event with restricted impact, already anticipated by the markets n What impact would a Fitch downgrade to AA- have on the market? On 24th March Fitch downgraded the Portuguese debt from AA to AA- and expressed a negative outlook for same in light of the following:
160.0 140.0
• The unlikeliness of economic upturn in comparison with the other countries in the Euro zone, which shall weigh on public finances in the medium term;
120.0
• A significant reduction in Portuguese public finances during the crisis, with a budgetary deficit totaling 9.3% of the GDP in 2009 as opposed to 2.6% in 2008.
60.0
The announcement of the Portugal downgrade has had only a very limited effect on the markets i.e. slight withdrawal on the European stock markets and a 2% reduction of the Lisbon stock market on the same day. The spreads on the bond stock markets have, on the whole, remained, stable in comparison with Germany (+2.1 bp for the two-year spread, -0.3 bp for the fiveyear spread and +2 bp for the ten-year spread). The downgrade was actually widely anticipated by the market. Fitch is only repositioning itself as regards the S&P, which has already graded Portugal as A+. Moody’s Aa2 grade should be noted, which is, as always, a rating mark above Fitch.
Euro Zone: Public Debt Forecasts
% of GDP
100.0 80.0
40.0 20.0 0.0
Belgium Germany
Ireland
Greece
Spain
France
France Irlande Grèce Espagne 2009 Belgique Source: European Commission Allemagne
Italy
2010
Holland
Austria
Portugal
Finland Euro Zone
Italie 2011 Pays-Bas Autriche Portugal Finlande
Euro Zone: Inter-Country Five Year Spread 480 pb 440 400 360 320 280 240 200 160 120 80 40 0 01/07 05/07
Portugal downgrade
09/07
01/08
Portugal vs Germany
05/08
09/08
Spain vs Germany
Source: Bloomberg
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01/09
05/09
09/09
Greece vs Germany
01/10
markets flash / April 2010
n Forecasts
n The point of view of Natixis
The 2010 Portuguese Draft Finance Law (DFL), presented on 26 January and which must be submitted to Brussels over the next few days, takes the same direction as the Fitch recommendations. It is based mainly on freezing civil servant salaries over 4 years, reducing expenditure, implementing a ceiling for social assistance and postponing public investment. It also targets tax loopholes by increasing taxation of the upper income bands and withdrawing tax benefits. The 2010 DFL envisages an effort of 1.1 GDP point towards an 0.5 GDP-point increase in income and reduction in expenditure of approximately 0.6 GDP point. This scenario will allow the deficit to be reduced to 3% by around 2013.
Asset Management
Natixis Asset Management differentiates between shortterm securities (for which the carry is an important factor) and long-term securities, which are extremely sensitive to the risk of rate deviations in comparison to Germany. It therefore adopts a neutral position for short-term maturities. The downgrades have been anticipated by the market whereas the risk of deviation has been compensated by a correct yield supplement. However, the negative prospects for growth and reduced public finances in the long term, however, feed Natixis Asset Management's negative opinion of long-term maturities.
The structural weaknesses of the country (low competitivity, weak potential growth and Spanish cycle dependency) combined with an economic context which will remain relatively fragile may hinder the achievement of these objectives.
Written on 31/03/2010 by the Fixed Income Department of Natixis Asset Management
However, in comparison with the other "at-risk" countries in the Euro Zone, the situation in Portugal raises the least cause for concern – the credibility of the Portuguese Government has not been brought into question and its level of debt remains within the European average. It should benefit from increased confidence following the Eurogroup decisions.
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