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INVESTMENT GRADE

Portugal’s debt is creeping out of the junk heap

Benfica players celebrate with their supporters for winning the Portuguese Premier League
Reuters/Pedro Nunes
Cause for celebration.
By Eshe Nelson
Published Last updated This article is more than 2 years old.

The remaining traces of the euro zone’s sovereign debt crisis are steadily fading away. One of the worst affected countries, Portugal, had its debt rating upgraded by S&P, to “investment grade” status, on Sept. 15 after five years as “junk” debt.

Portuguese finance minister Mario Centeno told Bloomberg that he expects the rating change to have a “very significant impact,” as it will encourage more investors to buy the nation’s debt, thereby reducing financing costs. Traders certainly played their part: the yield on Portugal’s 10-year bond plunged nearly 30 basis points, or 0.3 percentage points (yields fall when bond prices rise), on Monday morning. Benchmark Portuguese government bonds are now trading at their the lowest yields since January 2016. The country’s main stock index rose by nearly 2% in early trading.

Portuguese debt had been rated as junk by S&P since 2012, when the southern European country was struggling through a multibillion-euro international bailout. Back then, the nation’s 10-year bond yield was over 8%, a signal of deep distress.

Even though Portugal exited its bailout program in 2014, the nation struggled with political and economic turmoil afterwards, including bad loans weighing on its banking industry and persistently high unemployment. While the Portuguese economy has drastically improved, there are still hurdles. Second-quarter GDP growth unexpectedly slowed to 0.2% (paywall), from 1% in the first quarter. That said, the country is still set for its highest pace of annual economic growth in a decade.

S&P raised Portugal’s rating to BBB-, from BB+, with expectations that Portuguese GDP will grow by more than 2% on average between 2017 and 2020. S&P expects the government to meet its budget-deficit targets, and net general government debt to come in at around 117% of GDP in 2017 and 110% in 2020—high, but manageable.

Portugal is still rated as junk by the two other major ratings agencies, Moody’s and Fitch. Will they follow in S&P’s footsteps? Both agencies recently raised the outlook on Portugal, to positive from stable, making it likely that it could completely shake off its junk status in the near future. This is just the latest piece of good news for the euro-zone economy, which has recently been defying expectations and pushing the euro ever higher.

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