Fitch warns that Portuguese government debt is at risk of downgrade if Socialists take over
A major ratings agency has said today that Portugal’s government debt is at risk of losing its already mediocre credit rating if the Socialist-led coalition is appointed to govern.
Fitch said:
Fiscal relaxation resulting in a less favourable trajectory in government debt/GDP levels could lead to negative rating action, as could weaker growth that had a negative effect on public finances.
Prime Minister Pedro Passos Coelho’s minority government lost a confidence vote yesterday after the Socialist-led opposition managed to form a narrow majority with other left-wing parties.
While the President of Portugal is able to call new elections, they could not take place for six months, and he is likely to instead appoint Socialist leader Antonio Costa as Prime Minister over the next few days, Fitch believes.
“The combination of continuing political uncertainty and the advent of a government relying on parties that have hitherto taken an outspoken anti-austerity stance, would increase fiscal downside risk,” Fitch said.
“Similarly we think the prospect of reforms to boost investment and growth is fading due to political uncertainty.”
Despite the fact that all opposition parties are anti-austerity, they lack consensus on many issues which would help feed uncertainty.
Fitch explained:
A government led by the centre-left Socialist party and supported by the more radical Left Bloc and Communist party would command a parliamentary majority, but this would not eliminate political uncertainty. The three parties' agreement falls well short of a comprehensive policy platform, and any kind of co-operation had seemed unlikely until recently, given their disparate outlooks and policy priorities, increasing the risk that any government they form will not serve a full term.
Statements so far indicate that the potential new government has little intention of adopting some of the smaller parties' more extreme proposals (such as sovereign debt restructuring), and would maintain the Socialists' commitment to abiding by EU fiscal rules, implying a slowdown rather than reversal of existing deficit-reduction plans.