Debt and rating: Portugal beats Italy, and not by a little.
Today the BTP-Bund spread is decreasing after the decision of the rating agency Moody’s to confirm the “Baa3” rating of Italian public debt, raising the outlook from “negative” to “stable”.
But the 10-year Italy-Germany spread can only pale in comparison to the Portugal-Germany spread which, in these same hours, after the promotion of the Portuguese rating by Moody’s itself, fell to 58.7 basis points.
The agency has in fact rewarded the homework that Lisbon continues to do at home, ensuring a downward trajectory for the debt-to-GDP ratio, raising the rating by two levels.
BTP-Bund spread down post Moody’s. But traders look to Portugal’s miracle
The BTP-Bund spread narrows to around 172 basis points today, compared to 10-year BTP rates that do an about-face, falling to 4.32%.
The Meloni government claims victory, but investors are currently looking above all at miracle of Portugal.
Despite the political crisis that hit the country and which resulted in the resignation of Prime Minister Antonio Costa, Moody’s also raised its long-term rating on Portugal’s debt by two steps, bringing it from Baa2 to A3.
Well yes, Portugal’s rating has entered in the club of the highest ratings on the value scale: the one equal to A.
The political crisis that exploded in Portugal did not prevent Moody’s from upgrading the country’s public debt rating.
The agency justified the upgrade, announced as in the case of the one for Italy last Friday 17 November, with the effects that the economic and fiscal reforms launched by Lisbon will have on the country’s creditworthiness “over the medium term, as well as with the positive consequences of “private sector deleveraging” and “continuing strengthening of the banking sector”.
Well yes, if Portugal’s rating has been raised to the rating club of Ato be precise at A3 from Baa2, It is thanks to the confidence that Moody’s places in the country’s ability to efficiently continue along the path of reforms.
This is how buys are triggered today not only on BTPs, but also on on Portuguese bonds.
Portugal-Germany spread: 1/3 compared to Italy-Germany spread
The effect is clear, just as it is clear the difference between the Italy-Germany spread and the Portugal-Germany spread.
The 10-year BTP Bund spread is certainly benefiting from the flurry of announcements that have arrived in recent weeks from various rating agencies, culminating last Friday with Moody’s verdict: the one considered the most important of all, as a downgrade would have made the rating slip on Italy’s public debt below investment grade level, taking it to “junk”, ergo rubbish.
Instead, Moody’s left the rating unchanged, simultaneously raising the outlook that had worsened to negative immediately after the fall of the Draghi government.
No Moody’s junk rating for BTPs and Meloni’s Italy. The banking and ECB factors
The BTP-Bund spread has fallen like this since the beginning of today’s session to the lowest in two months, at 171.4 basis points, before reducing losses and fluctuating around 172 basis points.
A good progress, if we consider that, last Monday, as a Reuters article points out, the differential was around 185. And an indisputable improvement if we consider that until a few weeks ago, after the jump up to 200 basis points following the publication of Nadef (Update note to Def) on the part of the Meloni government, had arrived to leap up to approximately 210 basis points.
The decline in the BTP-Bund spread and rates occurred after the announcement of the ECB by Christine Lagarde – which armored the PEPP, an instrument also known as pandemic QE – and also after the flurry of announcements on Italy which had various rating agencies as sender.
The result is that BTP rates have pointed downwards and moved further and further away from the danger threshold of 5% breached at the beginning of October.
These numbers, however, pale in comparison to those relating to Portugal’s debt. The 10-year Portugal-Germany spread is in fact around 58.7 nase points, practically a value that is around 1/3 compared to the BTP-Bund spread. Furthermore, 10-year Portuguese bond rates are at around 3.18%.
Moody’s indicates a strong reduction in the Portuguese debt-to-GDP ratio
This is what we read in the press release with which Moody’s made its big announcement on Portugal’s sovereign debt rating.
In particular, the rating agency estimates a continuous improvement of the country’s public financesspecifically the debt-to-GDP ratio which, in his opinion, will continue to fall, reaching slightly above 100% of GDP during 2024 (compared to around 140% in Italy):
a ratio which, Moody’s underlines in the note, fell by 16.4 percentage points compared to the levels before the Covid-19 pandemic in 2019, slipping to the lowest since 2010.
“With such a strong reduction in public debt – we read in the press release – Portugal is an exception among the advanced economies monitored by Moody’s. Only Greece (Ba1 with stable outlook), Cyprus (Baa2 with stable outlook) and Ireland (Aa3 with stable outlook) will show even more marked declines in debt-to-GDP ratios in the period between 2019 and 2024”.
The upgrade of Portugal’s public debt rating is also explained by the “solid medium-term growth prospects”. Moody’s predicts that Portuguese GDP will rise by around 2% over the next five years, in line with Lisbon’s estimates of its potential growth. The agency highlights in this regard how Portugal’s GDP growth potential has “grown significantly over the last decade, thanks to a range of economic and labor market reforms that have increased competitiveness and ‘occupation’ of the country.
In the short term, Portugal’s GDP growth is expected to slow to +1.6% in 2024 compared to +2.1% in 2023, due to restrictive fiscal and monetary policies. “That said, job growth, the strength of tourism and the acceleration of spending of EU funds (with the PNRR plan) will support growth.” So much so that, according to Moody’s, Portuguese GDP growth will accelerate to +1.9% by 2025, thanks to both foreign and domestic demand”.