Portugal wins more time for recovery after rating decision

AP News
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Posted: Apr 29, 2016 12:44 PM

LISBON, Portugal (AP) — Portugal and the rest of the eurozone could breathe a sigh of relief Friday after international ratings agency DBRS said it wasn't lowering Portuguese sovereign debt to junk status — a feared move that likely would have sparked a fresh bout of international jitters about the soundness of the shared currency.

Toronto-based DBRS is the only main agency that did not cut Portuguese bonds from investment grade following the debt-stressed country's 78 billion-euro ($88.8 billion) bailout in 2011 when a decade of measly growth and huge debts pushed it close to bankruptcy.

Portugal is still recovering from that low point and is widely regarded as the eurozone's weakest link after Greece.

Portugal has slashed its budget deficit and reformed its economy since the rescue, but it needs at least one investment rating to qualify it's the financial help from the European Central Bank that is vital for its fragile recovery.

The DBRS decision was widely expected by analysts, but the tension underlined doubts about the anti-austerity strategy of Portugal's new Socialist government, which came to power with the backing of the Communist Party and radical Left Bloc.

DBRS said in a statement it was keeping Portugal's rating at BBB (low), just one notch above junk status. Its next review is due in October.

The agency noted that Portugal has made progress: The budget deficit has fallen from over 10 percent in 2010 to 4.4 percent last year, and the government expects the economy to grow 1.8 percent this year and next. Unemployment is down to 12.1 percent from a record 17.7 percent in 2013.

But government debt remains the third-highest in the European Union at 129 percent of annual GDP, and banks are still struggling to turn a profit.

DBRS warned the rating was at risk "if there is a weakening in the political commitment to sustainable economic policies or if growth markedly underperforms."

The center-left government that took office last November has pledged to "turn the page on austerity" and has reversed some of the money-saving measures of the previous center-right administration. That prompted concern from eurozone officials and investors that Portugal could backslide on its commitments.

The government, however, has vowed to abide by the fiscal discipline required of countries sharing the euro currency.

Its parliamentary alliance with far-left parties has so far held firm, with the three voting together Friday to defeat opposition parties' efforts to block the government's spending and reform plan.