• S&P lifts Portugal credit rating to an investment level for the first time since January 2012
  • Portugal 10Y yield plunges 27bps on the report, the spread to German bund narrows
  • Euro are growth could benefit from higher Portugal’s investment grade assigned by S&P

Standard&Poors decided to lift the Portuguese credit rating to an investment grade on Friday for the first time since January 2012. Consequently, the country got out of the junk rating which was announced when Portugal was going through a bailout program provided by the European Union and the International Monetary Fund.  Along with lifting the rating from BB+ to BBB-, the S&P raised its economic growth forecasts for the country which appears to be in line with projections provided by the Bank of Portugal suggesting acceleration of growth to 2.5% this year.

In effect, the Portuguese 10Y yield has collapsed immediately after the opening and it’s now trading as much as 27 basis points lower compared to the Friday’s close. Furthermore, the spread to the German bund has plunged to the lowest since January 2016. There is no doubt that looser financing conditions should act in favor of the ongoing economic improvement. According to Portugal’s finance minister Mario Centeno, an upgrade made by S&P could attract a broader array of investors to spur lower borrowing costs both for the government and corporations.

link do file download linkPortugal has marked second best economic upturn since 2012 and it stacks up quite well against its peers (PIGS). Source: Bloomberg

Portugal has now the investment rating both from S&P and DBRS which secures the country to be eligible for the ECB’s bond buying program. Notice, that Fitch and Moody’s haven’t chosen to change their ratings as of yet. However, both agencies have raised the outlook for Portugal from stable to positive which could foretell an impending upgrade as far as the rating is concerned.

Given that the European Central Bank is slowly gearing up for a reduction of purchases of bonds, looser financing conditions in Portugal could help the Portuguese central bank to meet its GDP forecast this year. On top of that, lower yields might appease a potential adverse impact stemming from lower purchases of bonds by the ECB. Having said that, the euro area could benefit from an upgrade of the Portugal rating which in turn might make the Governing Council more resilient to the stronger euro.