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.
Andreas Adriano, a spokesman for the IMF, declined to comment on whether Portugal would qualify for the fund's existing program of short-term credit or liquidity lines for countries facing potential crises.
The president of Portugal's largest listed bank said the country should ask its European partners for a bridging loan of at least €10 billion ahead of a full bailout request by the government that wins a June general election.
Carlos Santos Ferreira, head of Banco Comercial Portugues, said late Monday that Lisbon "has to ask for intermediate support from the European Commission, and it should be requested right now."
The Commission, however, has denied that it was in any talks over a bridge loan.
Daily paper Jornal de Negocios reported Tuesday that the country's top bankers are refusing to purchase any more national debt — a sign of just how pessimistic expectations are. Officials had no immediate comment on the report. The banks have for months battled liquidity problems and have relied heavily on the ECB for funds.
Moody's said once the election is out of the way it expects the new government will "likely approach the (bailout) facility as a matter of urgency."
However, the possibility of a bailout — and the conditions under which it might be granted — are at the center of the country's political debate.Comment on this story
None of the main parties say they want to ask for foreign help. They are wary of the political stigma and the strings that come attached, such as painful austerity measures imposed from abroad.
Tax hikes and pay and welfare cuts by the outgoing government have already triggered an outcry — a Lisbon subway strike during the morning commute was the latest act of protest by angry trade unions.
Pylas contributed from London. Gabriel Steinhauser in Brussels also contributed.