Fitch gives Portugal more time, warns on economy

Fitch Ratings has postponed its decision on Portuguese credit standing to the fourth quarter from the end of July, giving the new centre-right government more time to implement austerity under an EU/IMF bailout plan.
But it warned in a report on Thursday that the rating remains under pressure and failure to meet fiscal targets or a serious deterioration of economic performance from an expected contraction of 2% this year would weigh on its review.
It said there are "significant risks around the GDP forecast".
Fitch had previously said it would come to a decision on whether to downgrade Portugal by the end of this month.
Portugal "remains on Rating Watch Negative. Historically, most Fitch RWN have been resolved with a downgrade, but not always," Fitch analyst Douglas Renwick told Reuters when asked about the likelihood of a rating cut in the fourth quarter.
Earlier this month, ratings agency Moody's slashed Portugal's rating to junk status and said it might need a second bailout, causing its bond yields to blow out and triggering a wave of criticism in Europe for not giving the government time to implement the terms of the 78-bln-euro bailout.
The other two main agencies — Fitch and S&P — both rate Portugal at BBB-minus, at the very bottom of investment grade.
Fitch said its review will take into account a lower lending rate and longer maturities of bailout loans announced at last week's Eurogroup summit for Greece, Ireland and Portugal , as well as the first quarterly EU/IMF review of Portugal's performance under the bailout, due in mid-September.
It also said that "worse-than-expected performance in the banking sector would be negative for the sovereign, which must backstop the system's solvency".
The bailout includes a 12 bln euro line for banking sector recapitalisation. All four main Portuguese banks passed EU stress tests earlier this month, but the Bank of Portugal said it still wants them to increase base capital.
Standard & Poor's said earlier this month achieving fiscal targets and implementing reforms could stabilize the country's ratings despite a negative outlook and significant implementation risks of the programme.
Both Fitch and S&P have said the government's comfortable majority in parliament reduces short-term policy risks. The previous minority Socialist government collapsed in March after failing to push its austerity measures through parliament.
Fitch also said that the recently announced 50% tax on the traditional Christmas salary bonus given to Portuguese workers, which had not been required by the IMF/EU programme, was an encouraging sign of government commitment to meeting the budget deficit targets.
Portugal has to slash the gap to 5.9% this of GDP year from last year's 9.2% and then gradually to 3% in 2013.