Portugal’s credit rating was cut by Moody’s Investors Service for the second time in three weeks amid expectations it will be unable to avert a European bailout.
Moody’s downgraded Portugal’s long-term government bond ratings by one level to Baa1 from A3, and said it’s considering another reduction. Today’s move put the country at the same level as Ireland, Russia, Mexico and Thailand. Fitch Ratings on April 1 downgraded Portugal three notches to BBB-, the lowest investment grade, and kept the rating on “watch negative.”
“Moody’s rating action was driven primarily by increased political, budgetary and economic uncertainty,” the company said in an e-mailed statement today. It expects the winner of June 5 elections to tap the European Financial Stability Facility with “urgency,” and that Portugal will be able to get support from other euro members before then if necessary.
Investors are increasing bets Portugal will follow Greece and Ireland into seeking a rescue as its borrowing costs surge to record highs. Socialist Prime Minister Jose Socrates resigned last month after Parliament rejected his austerity measures needed to tackle the deficit. “Portugal still has an investment-grade rating with Moody’s, but it will become a big deal once it loses that status because those who don’t have a mandate to hold sub-investment-grade bonds will be forced to sell,” said Pavan Wadhwa, head of global interest-rate strategy at JPMorgan Chase & Co in London. “It’s just the matter of time before Portugal will have to seek external aid.”
Redemptions
The vote will be held between two bond redemptions, on April 15 and June 15. The maturities total 9 billion euros ($13 billion).
Socrates repeated yesterday that he will avoid requesting external aid. The gap between Portuguese and German 10-year bonds surged to 536 basis points today, the highest level since the start of the euro. The yield on five-year notes also climbed to a euro-era record of 10.06 per cent today. The country plans to sell as much as 1 billion euros ($1.4 billion.) of six- and 12-month bills tomorrow.
The cost of protecting against a Portuguese default rose to a record, surpassing the price for Irish debt insurance for the first time in seven months. Credit-default swaps on Portugal’s bonds climbed 12 basis points to 592.