Magazine article Global Finance

Debt: How Much Is Too Much?

Magazine article Global Finance

Debt: How Much Is Too Much?

Article excerpt

Six years after the bailout led by the European Unbn and the International Monetary Fund, Portugal is still saddled with one of the highest levels of debt in the region. Portugal's public debt-to-GDP ratio is the third-highest in the EU, following Greece and Italy. This represents a big drag on the economy, because funding is still weighed down by repayment needs.

The three major ratings agencies-Fitch, Standard & Poor's and Moody's-have rated Portugal sovereign debt as junk since the crisis. Only DBRS (originally known as the Dominion Bond Rating Service), a Canadian credit agency, left Portugal above investment grade; but that one rating is enough to allow the European Central Bank to keep buying Portuguese debt in its quantitative easing efforts.

Yields on government bonds have fallen drastically in recent years, with 10-year government bond yields at around 3% in 2017, down from 17% in 2012, fostering expectations of an improvement of the country's credit rating.

"If this kind of economic performance continues-and I don't see why it should not-it will be tough for credit rating agencies not to review the Portuguese outlook," says Jose Brandao de Brito at Millennium bcp. "I would expect at least one of the three of them to act before year-end."

Santander Totta's Vieira Montéira points out that Italy, for example, has a debt-toGDP ratio as high as Portugal's, yet its debt is rated investment grade.

"Public debt is high, but by itself is not a factor inhibiting a credit rating upgrade," he says. …

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