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LISBON (Reuters) - Standard & Poor's has revised its outlook on Portugal's "junk" BB/B sovereign ratings to stable from negative, citing new evidence that European institutions will continue to support the country's efforts to get its fiscal house in order.
S&P's decision - the first outlook upgrade by a major rater since a slew of ratings downgrades in 2011-12 - came after the European Union finance ministers earlier this week commended the Portuguese and Irish authorities' strong commitment to their respective adjustment programmes.
The ministers said they would seek how to smooth out the redemption schedules for the two countries' rescue loans for them to return to debt markets and exit their bailouts.
The rating agency's long-term BB rating is two notches below the coveted "investment grade" and is one notch higher than Moody's Ba3 and one notch lower than Fitch's BB+. The other two raters have a negative outlook on Portugal.
Luis Marques Guedes, secretary of state for cabinet matters, told a briefing after a weekly cabinet meeting the improved outlook was "excellent news for the country".
"We hope it brings an inversion of the trend of the past few years, which was very negative and has heavily punished the Portuguese economy, companies and families. But obviously this will depend on the country's progress and continued determination to fulfil the adjustment programme," he said.
Portuguese benchmark 10-year bond yields fell 20 basis points to 6.02 percent on Thursday - the lowest level since late January when Portugal made its first bond issue since the mid-2011 bailout.
The announcement also helped lift the euro slightly. The single currency edged to a session high of $1.2996 on the news in the early hours on Thursday and then continued to rise a tad above $1.3 after a brief retreat.
S&P said it expected "that Portugal's official European lenders are likely to extend their loans, thereby reducing the Portuguese government's refinancing risks and, to a lesser extent, its interest costs".
"At the same time, we expect Portugal's official lenders... to adjust Portugal's fiscal consolidation path under the programme, mostly to reflect the weaker-than-previously-assumed economic activity."
S&P said this should make Portugal's adjustment process more sustainable, both economically and socially, reducing the risk that the government will not comply with the programme.
S&P said it could cut Portugal's ratings if political commitment to the current structural adjustment diminishes and if European institutions back away from extending the maturity of Portugal's official debt.
"We could raise the ratings if export performance turns out to be much better than our current expectations or if investment picks up significantly," it said.
"This would, in our view, support Portugal's recovery and contribute to job creation, thereby strengthening the social contract. A more robust recovery would also contribute to a faster fiscal consolidation and debt reduction path, improving Portugal's fiscal indicators."
Reporting by Ian Chua and Andrei Khalip; Editing by Stephen Nisbet