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Portugal pays price for Moody’s downgrade

Indebted Portugal paid the price in the markets Wednesday for a damaging Moody’s ratings downgrade which the government condemned as “premature” even if it was expected.

Seeking to raise one billion euros ($1.39 billion) in a short-dated bond sale, the government debt agency sold 12-month bonds at a rate of 4.331 percent, up from the 4.057 percent at the last such sale only on March 2.

Demand fell sharply too as Moody’s downgrade rattled confidence in Portugal’s ability pay its way and avoid a debt bailout after fellow eurozone strugglers Ireland and Greece had to be rescued last year.

Finance Minister Fernando Teixeira dos Santos said Moody’s action was expected but seemed out of place in light of Friday’s eurozone leaders meeting which agreed a series of measures to bolster the euro system.

“Given developments in Europe, the government’s own measures to consolidate (the public finances) and the upcoming EU summit on March 24-25, Moody’s decision seems to me to be premature,” Teixeira dos Santos said.

At the same time, “since Moody’s had already downgraded ratings on other countries, the action was expected,” he added.

Last week, Moody’s downgraded both Greece and Spain, the latest in a long series of moves by the top three ratings agencies warning that the public finances in the weaker eurozone members were at danger point.

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

Critics say ratings downgrades, such as Wednesday’s, often give volatile markets another lead to trade on, making life more difficult for the country in question.

Finance Minister Teixeira dos Santos said “current market conditions are clearly unsustainable. Rates are high, without a doubt.

“The country can cope with these conditions for a certain time so as to redress the situation,” he added.

On Tuesday, Moody’s 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, the key to increasing government revenues and so restoring the public finances.

The move came as Portugal’s Socialist minority government faced an onslaught after announcing a new austerity package Friday, raising fears it could fall.

Lisbon has pledged to reduce the public deficit to 4.6 percent of GDP this year then to the eurozone limit of three percent in 2012.

But Moody’s cast doubt on the government’s ability to deliver.

Instead of cutting, Moody’s said government spending may need to expand further “in the event it has to provide financial support to the banking sector and government-related institutions, which are currently unable to access capital markets.”

At the same time, Lisbon would face challenging market conditions, including an expected rise in eurozone interest rates, that “will cause its debt affordability to weaken,” Moody’s warned.

Portugal’s debt stood at 143 billion euros ($200 billion) in 2010, or 83.3 percent of GDP, far above the EU limit of 60 percent.

Given Lisbon’s conundrum — it might have to spend more to strengthen the economy but lenders will not support such action — Moody’s said a further downgrade of Lisbon’s rating was “likely” over the next one to two years.