S&P downgrades Portugal credit rating one notch to BBB-

Standard & Poor’s said Tuesday it cut Portugal’s credit rating by one notch to BBB- as debt restructuring may be a pre-condition for help from the European Union’s new bailout fund.

S&P, one of the top three ratings agencies, said its decision reflected its concerns that terms to access the new EU bailout fund, the European Stability Mechanism (ESM), agreed at an EU summit last week would be to the detriment of creditors.

The EU summit “confirms our previously published expectations that (i) sovereign debt restructuring is a potential pre-condition to borrowing from the ESM, and (ii) senior unsecured government debt will be subordinated to ESM loans,” the ratings agency said in a statement.

“Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers,” the statement added.

Investors fear that the bottom line of the new ESM, which comes into operation in 2013, means that they could see their investments restructured, either in terms of the amount they get repaid or the time they have to wait for repayment.

In either event, their investment in Portuguese government assets, primarily bonds, would be worth less.