September 28, 2017 / 1:52 PM / 10 months ago

Interview - Portugal expects further credit upgrades soon, yields below Italy

LISBON (Reuters) - Portugal expects credit ratings agencies Moody’s and Fitch to lift its sovereign rating back to investment grade in coming months, bringing its bond yields close to Spanish levels, deputy finance minister Ricardo Mourinho Felix said.

Such upgrades from Moody’s and Fitch would remove Portugal entirely from “junk” territory for the first time since January 2012, at the height of its debt crisis. This month, Standard & Poor’s returned the country to investment grade, citing its improving economy and public finances.

Mourinho Felix told Reuters on Wednesday that Moody’s and Fitch were awaiting details of the 2018 draft budget, to be presented next month, and the completion of the sale of state-rescued Novo Banco, before taking Portugal’s credit ratings out of “junk” territory.

“Once the budget is approved and the Novo Banco sale is concluded, I believe there are conditions for Moody’s and Fitch to follow S&P ... and with everything developing normally I’d expect that to happen in the coming months,” he said in an interview.

Mourinho Felix said he was confident Novo Banco’s bondholders would accept the terms of the bank’s discounted buyback, a key condition for the agreed sale of the bank to U.S. fund Lonestar.

Without the sale, the bank could be liquidated, putting additional pressure on the country’s still fragile banking system, which was bailed out in 2014 and 2015.

Two weeks before S&P’s upgrade, Moody’s kept Portugal’s rating one notch below investment grade, but lifted the outlook to positive from stable, which usually means an upgrade is on the cards. Fitch did the same in June.

The government, which last year posted the lowest budget deficit in the 42 years of Portugal’s democratic history, at 2 percent of gross domestic product, hopes to cut it further to 1.5 percent this year and to 1 percent in 2018.

Fitch is expected to update its evaluation of Portugal on Dec. 15, and Moody’s at the start of 2018.

Following the S&P move, the spread between Portugal’s benchmark 10-year bond yields and that of neighbouring Spain narrowed to around 80 basis points from 130 basis points, and the spread with Italy slumped to 26 points from 83 points.

“When we have all three agencies with investment grade on Portugal, we can have a spread that is much closer to Spain’s yield ... meaning a negative spread with Italy,” Mourinho Felix said.

Speaking of Novo Banco, he said that “the information I have via the Resolution Fund is that the acceptance (of the bond buyback) is relatively broad-based”.

The Resolution Fund, to which all banks working in Portugal have to contribute, is the formal owner of Novo Banco and is the entity responsible for the sale process.

“I am confident of success,” Mourinho Felix said.

“Institutional investors obviously have their strategies, but they also can count very well,” he added, noting that failure to sell Novo Banco could trigger its liquidation or a resolution with more losses for bondholders.

Writing By Andrei Khalip; Editing by Catherine Evans

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