Moody's Two Notch Upgrade Reaffirms Positive Fundamentals

Portugal saw a two-notch rating upgrade to A3 (outlook stable) from Moody's after hours on Friday, helping the 10-year PGB/Bund spread to tighten 4.3bps to 60.4bps. The move brings Moody's rating for Portugal above that of S&P (BBB+, outlook positive) and in line with Fitch (A-, outlook stable).

• The decision provides further support to analyst expectations that Portugal's strong fundamentals should help spreads to Bunds stay contained around current levels.
• The 10-year PGB/Bund spread sits over 10bps narrower from the wides seen following ex-PM Costa's resignation on Nov 7. Moody's noted that the response to the political uncertainty indicated that "Portugal's institutions allow the country to address the issue effectively", though admit that such developments may "slow progress in investment and reforms linked to Portugal's NRRP".
• Rationale for the upgrade was the "sustained positive credit effects over the medium term of a series of economic and fiscal reforms, private sector deleveraging and ongoing strengthening of the banking sector". Favourable demographic trends were also noted.