Portugal may need to join Greece in seeking a second bailout because it will struggle to hit its deficit-reduction targets, Moody’s said as it slashed the country’s credit rating to junk.
In a new setback in efforts to quell the euro crisis, the credit ratings agency downgraded Portugal’s rating to Ba2 from Baa1 and assigned a negative outlook to the nation.
That makes Moody’s the first of the top three credit ratings agencies to assign Lisbon junk status during the eurozone crisis. It puts Portugal’s rating at the same level as El Salvador and Armenia. The euro slid against the dollar, trading at $1.4426 and dropping to 89.76p against sterling.
The decision marks a body blow to hopes that a new rescue package for Greece will bring a measure of respite to the single currency area.
The move came as European banks prepare to convene in Paris to discuss amended proposals aimed at striking a deal on a “rollover” of some of their exposure to Greek bonds.
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George Osborne told MPs yesterday that Greece had “issues of solvency” rather than just a shortage of liquidity and that bailouts of the country would only prove to be a “sticking plaster” if it failed to tackle its underlying problems. Portugal has been out of the line of fire since it signed up to a €78 billion (£70 billion) bailout with the European Union and the International Monetary Fund in May. That gave the country breathing space to put its finances on a sounder footing, but Moody’s said that it believed the private sector would be corralled into a new rescue of Lisbon, following in the footsteps of Greece.
The decision will heighten fear of a contagion effect across the euro area, with Spain and Italy also seen as vulnerable. Italy’s ten-year cost of borrowing rose yesterday to just under 5 per cent as Giulio Tremonti, its Finance Minister, cancelled a press conference to discuss a austerity package, citing “bad weather”. In a statement, Moody’s said that Portugal’s downgrade reflected “the growing risk that [it] will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition”.
It also said that there were “heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement”.
Separately, Michael Noonan, the Irish Finance Minister, said that his country’s planned €3.6 billion of savings next year was a minimum benchmark and “difficult decisions in relation to future consolidation remain”.