The downgrading of freshly bailed-out Portugal's credit rating to 'junk' shocked financial markets on Wednesday and cast new doubt on European efforts to rescue distressed eurozone states without debt restructuring.
The cost of insuring all weaker euro zone countries' debt against default rose and Portuguese two-term bond yields spiked by a whole percentage point on Moody's decision, announced late on Tuesday, to cut Portugal by four notches.
The euro and European shares fell on the news, ending a seven-day stocks rally, and Portugal had to pay more to sell 3-month T-bills on Wednesday.
The thumbs-down, coming so soon after a new centre-right Lisbon government announced austerity plans going beyond those demanded by international lenders, again called into question the EU strategy for dealing with the euro zone sovereign debt crisis.
Moody's said Portugal may need a second round of rescue funds before it can return to capital markets, just as European governments and banks are haggling over a second 120 billion euro bailout for Greece, which has a much higher debt ratio.
'The key worry of the market is that the events that we've been seeing with Greece are being repeated with Portugal,' said WestLB rate strategist Michael Leister.
Ireland, the other euro zone country to have received a bailout, said on Tuesday it may have to make additional spending cuts next year to meet deficit reduction targets in its 85 billion euro bailout plan due to an economic slowdown.
A Reuters analysis last week found that Dublin may also need a second bailout because it is unlikely to grow fast enough to make the envisaged full return to market funding in 2013.
Moody's cited the European Union's management of the crisis, and specifically the attempt to make private creditors share the burden of all future rescues as one reason for its steep downgrade.
The demand that banks and insurers share the risk is driven by growing public hostility in north European creditor nations to any further bailouts for south European states seen as having lived beyond their means.
But Moody's said insisting on private sector involvement not only increased the economic risk facing current investors, but also 'may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.
Representatives of Greece's major creditor banks were meeting in Paris under the aegis of the International Institute of Finance, a banking lobby, to discuss the terms of a proposed rollover of privately held Greek debt.
Banking sources said numerous issues involving credit ratings, interest rates, maturities and accounting consequences remained to be ironed out among multiple stakeholders and an agreement was only likely in September.
Source : New Age
