Markets flash

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April 2010

Portugal Downgrade

As seen by the Fixed Income department

n What impact would a Fitch downgrade to aa- have on the market?

On 24th March fitch downgraded the Portuguese debt from aa to aa- and expressed a negative outlook for same in light of the following:

• The unlikeliness of economic upturn in comparison with the other countries in the Euro zone, which shall weigh on public finances in the medium term;

• a significant reduction in Portuguese public finances during the crisis, with a budgetary deficit totaling 9.3% of the GDP in 2009 as opposed to 2.6% in 2008.

The announcement of the Portugal downgrade has had only a very limited effect on the markets i.e. slight withdrawal on the European stock markets and a 2% reduction of the lisbon stock market on the same day. The spreads on the bond stock markets have, on the whole, remained, stable in comparison with Germany (+2.1 bp for the two-year spread, -0.3 bp for the five-year spread and +2 bp for the ten-year spread).The downgrade was actually widely anticipated by the market. fitch is only repositioning itself as regards the s&P, which has already graded Portugal as a+. Moody’s aa2 grade should be noted, which is, as always, a rating mark above fitch.

COrPOraTE anD InvEsTMEnT BankInG / saving solutions / sPECIalIzED fInanCIal sErvICEs

Euro Zone: Public Debt Forecasts

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

BelgiqueAllemagneIrlande Grèce

Espagne France ItaliePays-Bas Autriche Portugal Finlande

% of GDP

2009 2010 2011

Belgium Germany Ireland Greece Spain France Italy Holland Austria Portugal Finland Euro Zone

Euro Zone: Inter-Country Five Year Spread

0

40

80

120

160

200

240

280

320

360

400

440

480

01/07 05/07 09/07 01/08 05/08 09/08 01/09 05/09 09/09 01/10

Portugal vs Germany Spain vs Germany Greece vs Germany

pb

Portugal downgrade

Source: European Commission

Source: Bloomberg

an event with restricted impact, already anticipated by the markets

www.am.natixis.com

Markets flash / april 2010

Disclaimer This document is destined for professional clients. It may not be used for any purpose other than that for which it was conceived and may not be copied, diffused or communicated to third parties in part or in whole without the prior written authorization of Natixis Asset Management. None of theinformation contained in this document should be interpreted as having any contractual value.This document is produced purely for the purposes of providing indicative information. It constitutes a presentation conceived and created by NatixisAsset Management from sources that it regards as reliable.Natixis Asset Management will not be held responsible for any decision taken or not taken on the basis of information contained in this document, norin the use that a third-party may make of it.

n Forecasts The 2010 Portuguese Draft finance law (Dfl), presented on 26 January and which must be submitted to Brussels over the next few days, takes the same direction as the fitch recommendations. It is based mainly on freezing civil servant salaries over 4 years, reducing expenditure, implementing a ceiling for social assistance and postponing public investment. It also targets tax loopholes by increasing taxation of the upper income bands and withdrawing tax benefits.

The 2010 Dfl envisages an effort of 1.1 GDP point towards an 0.5 GDP-point increase in income and reduction in expenditure of approximately 0.6 GDP point. This scenario will allow the deficit to be reduced to 3% by around 2013.

The structural weaknesses of the country (low competitivity, weak potential growth and spanish cycle dependency) combined with an economic context which will remain relatively fragile may hinder the achievement of these objectives.

however, in comparison with the other "at-risk" countries in the Euro zone, the situation in Portugal raises the least cause for concern – the credibility of the Portuguese Government has not been brought into question and its level of debt remains within the European average. It should benefit from increased confidence following the Eurogroup decisions.

n the point of view of natixis asset Management natixis asset Management differentiates between short-term securities (for which the carry is an important factor) and long-term securities, which are extremely sensitive to the risk of rate deviations in comparison to Germany.It therefore adopts a neutral position for short-term maturities. The downgrades have been anticipated by the market whereas the risk of deviation has been compensated by a correct yield supplement.

however, the negative prospects for growth and reduced public finances in the long term, however, feed natixis asset Management's negative opinion of long-term maturities.

Written on 31/03/2010by the Fixed Income Department

of Natixis Asset Management