LONDON (MNI) – Moody’s today downgraded Portugal to A1 and put the
country on stable outlook.

Moody’s said that the country’s financial strength was likely to
weaken over time while growth prospects remained relatively weak.

A full text of the Moody’s statement follows:

Rating action concludes review for possible downgrade

London, 13 July 2010 — Moody’s Investors Service has today
downgraded Portugal’s government bond ratings to A1 from Aa2. The
two-notch downgrade reflects the rating agency’s following conclusions:

1.) The Portuguese government’s financial strength will continue to
weaken over the medium term, as evidenced by ongoing deterioration in
the country’s debt metrics, such as debt to GDP and debt to revenues;
and

2.) The Portuguese economy’s growth prospects are likely to remain
relatively weak unless recent structural reforms bear fruit over the
medium to longer term.

The rating outlook is now stable, with the upside and downside
risks evenly balanced.

Today’s rating action concludes the review for possible downgrade
that Moody’s initiated on 5 May 2010.

Separately, Moody’s has also affirmed Portugal’s short-term issuer
rating of Prime-1 with a stable outlook. Portugal falls under the
Eurozone’s Aaa regional ceilings for bonds and bank deposits, which were
unaffected by the Portuguese government’s downgrade.

RATIONALE FOR DOWNGRADE

Moody’s believes that the Portuguese government’s financial
strength will continue to weaken over the medium term, as evidenced by
the recent and ongoing deterioration in the country’s debt metrics. “The
Portuguese government’s debt-to-GDP and debt-to-revenues ratios have
risen rapidly over the past two years,” says Anthony Thomas, Vice
President – Senior Analyst in Moody’s Sovereign Risk Group. “This
deterioration came about due to the government’s anti-crisis measures
and the operation of the budget’s automatic stabilizers, such as higher
unemployment benefits, when the economy went into recession.”

Looking ahead, Moody’s expects the government’s debt metrics to
continue to deteriorate for at least another two to three years, with
the debt-to-GDP and debt-to-revenues ratios eventually approaching 90%
and 210%, respectively, before stabilizing once the budget has moved
back into a primary surplus position.

“Moody’s also remains concerned about the economy’s medium-term
growth potential,” says Thomas. The analyst says it is not yet clear
whether the reforms will boost growth sufficiently to allow the
deterioration in the country’s debt metrics to eventually reverse,
especially as the labour market reforms are relatively recent. This
would imply that Portugal’s government would remain relatively highly
indebted for the foreseeable future.

RATIONALE FOR STABLE OUTLOOK

Whilst the government’s debt metrics have undoubtedly deteriorated,
Moody’s believes that they will stabilise at levels that are
commensurate with a strong A rating. In our view, upside and downside
risks to that base case scenario are evenly balanced. If in addition to
recent fiscal consolidation efforts, the structural adjustments
undertaken by both government and private sector achieve a boost in
productivity and growth potential, the government’s debt metrics and the
country’s external position could strengthen beyond current
expectations. At the same time, however, Moody’s notes that a more
severe deterioration in the country’s debt metrics in the event in the
event of higher interest rates or weaker economic growth cannot be
completely ruled out.

–London Bureau; tel: +442078627492; email: dthomas@marketnews.com

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