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Is Portugal about to lose its tier-3 status?

Jeremy Weltman Thursday, August 02, 2012

Portugal has reached the bottom of the third tier on Euromoney Country Risk's rankings - and even that position looks precarious.

After seeking a bailout in May last year, Portugal has fallen 22 places to 66 in ECR’s global rankings, and to the bottom of the third (of five) tiers that group the countries on similar risk metrics. Its ECR score has slipped from 60.7 to 49.8 over that time, putting the country on a collision course with the Philippines, Romania and Kazakhstan – three climbers in the rankings. The sovereign’s descent has also widened its point-differential with the eurozone average, to 18.1 from 17.6 in January, and kept it distant from sliding Spain.

Although S&P recently reaffirmed Portugal’s BB credit rating, citing progress with structural reforms, it also maintained a negative outlook due to the downside risks associated with Spain. Indeed, the situation is looking increasingly worrisome for the Portuguese government, which had passed a fourth review of its spending cuts and reform programme with the troika back in June

As austerity bites, the recession is deepening. These developments are not lost on the Organization for Economic Cooperation and Development (OECD Offers Some Hope But Portugal's Finances Look Terrifying), which is predicting a huge contraction in real GDP this year, amounting to 3.2% (other forecasters take a similarly pessimistic view). Unemployment is soaring (to 15.4% of the labour force in June), the property market is still collapsing, and there is no sign of growth in 2013 either. Lower than expected tax collection in the first half of this year now more or less consigns the government to failure in reaching its budget deficit goal without more public spending cuts. But those cuts will only exacerbate the crisis. So, in spite of the positive gloss painted by Portuguese policymakers, Portugal will need more time, and possibly a new plan (involving stimulus), to resolve the crisis.

Tier 4 is worryingly close.

This article was origninally published by Euromoney Country Risk

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