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Portugal pays price for junk status credit rating

Published on 06/07/2011

Portugal paid an immediate price on Wednesday for a big ratings downgrade overnight, having to fight heightened investor worries about its debt when it raised three-month cash.

Portugal managed to raise 848 millions euros ($1.22 billion) for three months, but the market-indicated rate or yield on its 10-year debt shot up in response to the downgrade to 11.749 percent from 10.755 percent late on Tuesday.

“The sale was clearly affected by this decision and investors ended up demanding a higher interest when, since the last ten days, short-term rates had fallen,” Filipe Silva, fixed-income strategist at Carregosa bank said.

Overnight, Moody’s ratings agency hit Portuguese 10-year debt with a four-notch downgrade to junk status and warned it could fall further because of prospects that Portugal might need a second debt rescue.

Moody’s also said there was an increased likelihood that a second rescue for the country, already being rescued by the European Union and the International Monetary Fund, might be conditional on private investors shouldering part of the costs.

Some analysts interpreted this as meaning that Moody’s was ready to follow the line taken by Standard&Poor’s on Monday that outline terms of a second rescue for Greece might well trigger a rating of selective default.

The rate on Greek 10-year debt eased a fraction to 16.183 percent from 16.186 percent.

The Portuguese debt management agency IGPC said it had placed 848 million euros’ worth of 3-month treasury bills at a median interest rate of 4.926 percent, up from 4.863 percent in a similar offer on June 15.

Demand for the bonds was twice the offer, the agency said.

IGPC had initially planned to raise 750 million to one billion euros before Moody’s made its statement downgrading Portugal’s debt rating to non-investment status from “Baa1” to “Ba2”.

In the eurozone, the 10-year rate, or yield, on debt issued by Spain rose to 5.563 percent from 5.474 percent late on Tuesday, and on Italian debt to 5.083 percent from 4.993 percent.

Both countries are considered to be potentially at risk owing to the state of their public finances and growth prospects, although unlike Greece, Ireland and Portugal, they are not being rescued.

Warnings from rating agencies that they might consider new rescue terms for eurozone countries as cause for a default notation is of deep concern on financial markets.

This is because there could be a damaging domino effect across the eurozone and into global markets. So far, this concern has been focused on Greek debt.

Analysts at French brokers Aurel BGC, commenting on Moody’s statement, said it meant that the agency “would have to be much more severe regarding countries requesting help from Europe” and that “a downgrading of the sovereign notation would become automatic.”

At Credit Mutuel-CIC, strategists said that the decision by Moody’s “threatens to re-ignite worries about the strength of the eurozone just as a resolution of the Greek case seemed to be entering a period of respite.”

They said: “The face-off between the rating agencies and the European authorities is going to get tougher, as is shown by the latest statements by (German Chancellor) Angela Merkel against S&P (rating agency).”

Merkel warned on Tuesday that governments and international organisations would not allow their freedom of judgement on a Greek rescue to be taken away by the agencies.