Standard and Poor’s lowers Portugal debt rating

Standard and Poor’s lowered its rating for Portugal’s long-term public debt Thursday two notches to “BBB” from “A-” following the defeat of an austerity package and the government’s resignation.

“In our view, the resulting increased political uncertainty could hurt market confidence and heighten Portugal’s refinancing risk,” the ratings agency said in a statement.

Portugal’s short-term credit rating remained unchanged at “A-2,” but its long-term credit rating went down two notches, from an “A-” to “BBB”, it said.

Portugal’s prime minister Jose Socrates resigned earlier in the day after the parliament rejected his latest austerity package.

“We expect that a successor government would have no choice but to adopt some version of these reform proposals, given investors’ apparently reduced appetite for Portuguese government debt, though perhaps on a delayed basis,” said S&P credit analyst Eileen Zhang.

The agency said it could lower Portugal’s rating by a notch again as early as next week depending on the outcome of European discussions on the design of the European Stability Mechanism (ESM), which is being set up to provide loans to members in financial distress.

“In particular, if we believe the ESM increases the likelihood of Portugal’s government bondholders being subject to a restructuring or a stand-still as a result of the terms of an ESM loan, becoming subordinated to ESM lending, or if Portuguese bonds experience materially reduced trading liquidity, we could lower the ratings on Portugal,” it said.