Portugal: Downgrade would have significant contagion effects

Analysts from Brown Brother Harriman, warn about what could happen if DBRS downgrades Portugal’s credit rating.

Key Quotes:

“Portugal does not pose systemic risk, but there may be contagion to Spanish banks that have exposure and Italian assets that often appear correlated to risk assets.”

“DBRS is set to review Portugal's credit rating on October 21. It has expressed concern about rising yields and the fragility of the recovery. The sovereign-bank link has not been severed (…) DBRS has a stable rating for Portugal. It could still cut the rating, but it is unlikely.”

“If DBRS does take away Portugal's investment grade rating, there would be significant implications. Portuguese banks, which are heavier users of ECB facilities, could no longer use government bonds as collateral, without a waiver from the central bank. Its bonds would no longer qualify under the ECB's sovereign bond purchase program. Portuguese banks could be forced, like Greek banks to rely on credit from the national central bank (Emerging Lending Assistance).”

“Although a loss of Portugal's investment grade status is not the most likely scenario, the contagion effect could be significant. It comes at a time, where domestic political considerations, especially in Germany, would leave little room to maneuver. A new assistance program cannot be ruled out.”

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