Why as an investor, one should care about Portugal’s credit rating

Horacio Villalobos | Getty Images

A couple look at Alfama, one of the city’s historic neighborhoods, from the Miradouro de Santa Luzia in Lisbon, Portugal.

Portugal’s credit rating is set to return to the headlines Friday as Standard & Poor’s updates its opinion on the southern euro zone economy. This could be just another statement if the country wasn’t hanging on to its one and only investment grade.

Canada’s DBRS is the only credit rating agency willing to give Portugal an investment grade, which allows the European Central Bank to buy Portuguese government bonds. Without that, Portugal’s finances would be in a worse position.

The Portuguese government has often said that “it doesn’t make any sense” that rating agencies have kept their grades unchanged as if nothing had improved in Portugal since the crisis.

However, recently, the economic recovery seen in Portugal since the sovereign debt crisis has indeed begun affecting the way agencies such as Moody’s and Standard & Poor’s see the economy, indicating that in the near future more investors could be considering buying Portuguese bonds.

“The positive outlook signals that we would expect to draw such a conclusion, or not, over the next 12-18 months, and quite possibly within 12 months,” Moody’s said on September 5th about moving Portugal’s rating into investment grade.

“The rating would be upgraded if we conclude that the positive economic and fiscal trends are likely to be sustained and if the high debt burden moves on a steady, downward trend. The outlook could be stabilized if the government’s commitment to fiscal consolidation and debt reduction or its capacity to do so was to wane,” the agency added in the same note.