Portugal Ratings Cut to Junk by Moody’s on Financing Risk

Portugal Ratings Cut
Public administration workers protest against the new budget policies in Lisbon, on November 6, 2010. Photographer: Patricia De Melo Moreira/AFP/Getty Images

Portugal’s credit rating was cut to below investment grade by Moody’s Investors Service on concern the country will need to follow Greece in seeking a second bailout. The euro dropped for the first time in seven days.

The long-term government bond ratings were lowered to Ba2, or junk, from Baa1, and the outlook is negative. Discussions to involve private investors in a new rescue plan for Greece make it more likely that the European Union will require the same pre-conditions in the case of Portugal, Moody’s said in a statement.

“That’s very significant because not only does it affect current investors, but it is likely to discourage new private sector lending going forward, and therefore reduce the likelihood that a country like Portugal will be able to regain access to the capital markets at a sustainable cost,” Anthony Thomas, a senior analyst at Moody’s in London, said in a telephone interview today.

The euro fell 0.8 percent to $1.4417 at 3:54 p.m. in New York from $1.4539 yesterday, when it touched $1.4578, the highest level since June 9.

Treasuries rose, snapping a five-day losing streak, while stocks fell. The rally in 10-year U.S. Treasuries drove the yield down 0.06 percentage point to 3.12 percent. The Standard & Poor’s 500 Index fell 0.1 percent to 1,338.02.

Portugal is the second euro country rated non-investment grade by Moody’s, joining Greece, after winning a 78 billion-euro ($113 billion) international bailout in May.

‘Risks Remain’

“It’s a reminder that the sovereign debt crisis does not end with Greece and that risks remain with other nations in addition to Greece,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

Portugal this year joined Ireland and Greece in turning to the EU and the International Monetary Fund for emergency funding after their budget deficits ballooned. Moody’s today said it also based its credit rating cut on risks that Portugal won’t be able to fully achieve its deficit-reduction target.

Moody’s said the first driver of its decision was “the increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter.”

Portugal said the decision by Moody’s ignores the effects of an extraordinary income tax charge that was announced last week. There is a “broad political consensus” backing the execution of the measures that were agreed upon with the European Union, European Central Bank and International Monetary Fund as part of the aid program, the Portuguese Finance Ministry said today in an e-mailed statement.

Europe is inching toward a goal of getting banks to roll over 30 billion euros of Greek bonds, instead of opening a hole for the official lenders to fill. French banks, with the biggest holdings in Greece, worked out a rollover formula that is serving as an example elsewhere, with two options for bondholders to replace their maturing securities.

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