The prospect that Portugal’s eight-week-old rescue may fail to fix its finances sent bonds of debt- strapped euro governments lower after Moody’s Investors Service cut the nation’s credit rating to junk.
Moody’s slashed Portugal four levels to Ba2 from Baa1 late yesterday with a negative outlook. The decision came two months after Portugal got a 78 billion-euro aid package ($112 billion) and hours before today’s sale of 848 million ¤ of treasury bills.
“It’s a reminder that the sovereign debt crisis does not end with Greece and that risks remain with other nations in addition to Greece,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.
The cut may further strain relations between the rating companies and European Union policy makers, who are trying to ensure their plan for investor involvement in a new Greek bailout doesn’t trigger a default. Moody’s said the Greek plan makes it more likely the EU will require creditors to eventually contribute to aiding Portuguese. Portugal may remain shut out of financial markets beyond 2013, Moody’s said.
Risk Aversion
“The agency sees the participation of the private sector in the Greek debt restructuring as a factor implicitly impacting Portuguese ability to return to the capital markets,” Stefan Kolek, corporate credit strategist at UniCredit SpA, wrote today. “The agency utters what many were fearing: that a participation of the private sector will increase risk aversion in the market.”
Portugal’s new government, sworn in last month, will have to implement an austerity plan as a condition of the aid package from the EU and the International Monetary Fund. With the country’s debt and borrowing costs surging, Portugal followed Greece and Ireland in April in having to seek a rescue.
Portuguese bonds fell as yields on two-year notes soared 157 basis points to 14.5 per cent. The risk premium jumped to 865 basis points above 10-year German securities from 801. The yield premium on Spain’s 10-year bonds over Germany rose 12 basis points to 259 basis points and the gap for Ireland, the third EU nation to receive a bailout, widened 16 basis points to 870. Italy’s spread gained 10 basis points to 208, nearing a euro-era record of 223 on June 27.
Junk Status
The euro was little changed after falling fell 0.8 per cent to $1.4429 in New York yesterday following the Moody’s announcement.
Portugal joined Greece as the second euro country rated non-investment grade by Moody’s. European finance ministers last week authorised an 8.7 billion-euro loan payout to Greece by mid-July, basing a second three-year bailout package on talks to corral banks into maintaining their Greek debt holdings.
Europe is now inching toward a goal of getting banks to roll over 30 billion ¤ of Greek bonds, instead of opening a hole for the official lenders to fill. French banks, with the biggest holdings in Greece, worked out a rollover formula that is serving as an example elsewhere, with two options for bondholders to replace their maturing securities.
At the same time, Standard & Poor’s said this week the plan may temporarily place Greece in “selective default” if implemented.
Deficit Targets
On Portugal, Moody’s said it also based its credit rating cut on risks the nation won’t be able to fully achieve its deficit-reduction target. The three-year aid plan for Portugal set goals for a budget deficit of 5.9 per cent of gross domestic product this year, 4.5 per cent in 2012 and 3 per cent in 2013. The country had the fourth-biggest deficit in the euro region last year at 9.1 per cent of GDP.
Portugal’s public debt swelled to 93 per cent of GDP in 2010 from 68 per cent in 2007. The European Commission forecasts Portugal’s debt will increase to 101.7 per cent this year and 107.4 per cent in 2012. The debt ratio will start declining from 2013, according to the previous government.
Moody’s said the first driver of its decision was “the increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter.”
Portugal said the decision by Moody’s ignores the effects of an extraordinary income-tax charge announced last week. There is a “broad political consensus” backing the execution of the measures that were agreed upon with the EU, European Central Bank and IMF, the Portuguese Finance Ministry said yesterday in an e-mailed statement.
