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Portugal rating cut again, deepening debt crisis

By Pan Pylas

Associated Press

Published: Tuesday, April 5 2011 7:32 a.m. MDT

LISBON, Portugal — Portugal's financial woes deepened Tuesday after Moody's downgraded its credit rating for the second time in less than a month, further fueling fears the debt-laden country will have no option but to seek an international financial rescue package soon.

The Moody's decision was another grim milestone in Portugal's yearlong battle to avoid the same fate as Greece and Ireland, who last year were both forced to seek foreign help after months of financial turmoil.

Moody's reckons Portugal will become the third member of the bailout club and that whatever government emerges after June 5 elections will approach its euro partners "as a matter of urgency."

Standard & Poor's and Fitch, the other major rating agencies, also think the country's chances of avoiding a bailout are getting smaller. Both have recently cut the rating of Portuguese bonds to just above junk status, scaring away investors the country needs to lend it money.

If the price action in the markets is any guide, investors are few and far between — the yield on Portugal's 10-year bonds, which stood at 5.8 percent a year ago, struck a new euro-era record of 8.77 percent after the Moody's announcement. The rates are even higher for shorter-dated loans.

The higher borrowing rates come just as Portugal is predicted to suffer a double-dip recession as recent austerity measures and debt repayments bite into economic growth. An expected interest rate increase by the European Central Bank later this week and rising oil prices are likely to compound Portugal's problems.

Moody's said the government's current cost of funding is "nearing a level that is unsustainable, even in the short-term."

The ratcheting cost of Portuguese bonds are coming just as the country has to make big repayments for past borrowings.

Though analysts say Portugal has enough money in reserve to repay a €4.5 billion ($6.4 billion) loan that falls due later this month, they think it's going to be extremely difficult for it to find almost €7 billion ($9.9 billion) to roll over a bond and make interest payments in June. On top of that, Portugal will still need to collect funds to keep the country running.

In a gloomy warning, Moody's said it's "very unlikely" that the long-term bond markets will reopen to the Portuguese government or banks to any meaningful extent until the government dispels doubts over the program to get the public finances into shape.

As a result it said this confluence of heightened political, budgetary and economic uncertainties means that Portugal may suffer another rating cut soon.

Portugal is currently being run by a caretaker government after the administration quit in a dispute with opposition parties over how to reduce the high debt load. The state budget deficit last year was 8.6 percent of gross domestic product — way higher than the 3 percent limit for eurozone nations.

Though the political limbo makes it hard to see who might request a bailout in the near term, Moody's said other eurozone countries might provide Portugal with financial support in the interim period.

However, Germany, the bloc's paymaster, has repeatedly ruled out aid without strict conditions on fiscal measures. Brazil and China, who have flourishing economies, have previously offered to help, but not since the country's troubles intensified over the past month.

Even if Portugal faces a funding crunch before a new government is in place or a full bailout program has been negotiated, it "will be financed in one way or another," said Daniel Gros, director of the Centre for European Policy Studies in Brussels.

For instance, Lisbon could get a small loan from the International Monetary Fund, "making some minimal promises," to help them make urgent debt repayments, Gros said.

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