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Portugal pays more after Moody’s downgrade

Published on 16/03/2011

Portugal raised a fresh one billion euros ($1.39 billion) in a short-dated bond sale Wednesday but had to pay investors much higher rates of return after Moody's downgraded the indebted country.

The government debt agency said it sold the 12-month bonds at a rate of 4.331 percent, up from the 4.057 percent it paid only days ago on March 2 at a similar sale.

Demand too fell sharply — from 3.1 times the amount offered March to 2.2 times Wednesday as the Moody’s downgrade rattled investor confidence in Portugal’s ability to pay its way and avoid a debt bailout after fellow eurozone strugglers Ireland and Greece had to be rescued last year.

Such fears have driven yields — the rate of return buyers get on their investment — of Portuguese benchmark 10-year bonds way above seven percent recently, an unsustainable level for the longer-term.

On Tuesday, Moody’s Investor Services slashed Portugal’s debt rating to A3 from A1, and gave it a negative outlook, citing concerns the government will not be able to balance its books amid “subdued growth prospects.”

It questioned whether the country can implement dramatic spending cuts, as it faces political headwinds and the possible need to aid struggling banks and government-backed firms.

Moody’s also cast doubt on Portugal’s ability to quickly become more productive, a step that would boost growth and so raise government revenues.