S.&P. Downgrades Portugal and Greece Again

Both Portugal and Greece have been downgraded once again due to their heavy debt load and weak economies. S&P said that Portugal, after their government collapsed, would probably need an international bailout.

By MATTHEW SALTMARSH
Published: March 29, 2011
THE NEW YORK TIMES

PARIS — Standard & Poor’s said Tuesday that it had cut its sovereign credit ratings for Portugal and Greece, piling further pressure on the countries as they both seek to come to grips with a heavy debt load and weak economies.

S&P cut Portugal’s rating to BBB- from BBB, with a negative outlook — its second downgrade in less than a week. BBB- is the lowest investment grade rating at the agency, or just one notch above junk.

The Portuguese government collapsed last week after it was unable to push through Parliament further measures to plug its deficit and fend off the need for outside aid. The country now faces weeks of political uncertainty before general elections.

S&P said the country would probably need an international bailout. Lisbon has about €9 billion, or $13 billion, of bond redemptions coming due in April and June. Analysts suggest that Portugal’s current cash position is sufficient enough to cover the April redemption, but not the one in June.

The Greek rating, already junk, was cut by S&P to BB- from BB+ amid concerns the country may be required to restructure its debt.

European stocks were mostly lower after the announcement and the yields on benchmark euro-zone government bonds pushed higher. The yield on the Portuguese 10-year note hit 7.8 percent, around its highest level since the inception of the euro, and the Irish 10-year note was 9.7 percent.

Investors are awaiting the results of a health check on Irish banks, due to be released by the Irish central bank Thursday, and an announcement from the European Central Bank about a new facility to support struggling banks — initially Irish banks in particular. That is expected to be announced soon after the Irish stress tests.

The euro was broadly steady, at $1.4081, from levels late Monday.

S&P said that Portugal was likely to have to turn to the European Stability Mechanism, which is being set up by European countries.

Unlike, Greece, it might be able to avoid restructuring its debt, but the agency added that the government’s unsecured debt would probably be subordinated to future loans from the mechanism.

The agency retained a negative outlook on its rating as the “macro-economic environment could weaken beyond our current expectations. It also said “a political impasse could undermine the effective implementation of Portugal's adjustment program.”

S&P had previously cut Portugal’s rating on Friday, warning that it may do so again once the details of the new mechanism were announced. Its rival, Fitch Ratings, also cut Portugal’s ratings the same day after the government collapsed.

In the case of Greece, the agency said that the downgrade reflected the view that a sovereign debt restructuring was likely and would probably be a condition for Athens to borrow from the Union’s mechanism.

Likewise, senior unsecured Greek debt would be subordinated to loans from the fund, the Standard & Poor's credit analyst Marko Mrsnik said.

The agency also cited “growing risks to Greece's budgetary position.” It said recently released provisional data on the government’s 2010 balance indicated “a relatively higher cash deficit and larger outstanding spending arrears than planned.”

That suggests that last year's deficit could exceed the government's target of 9.6 percent of gross domestic product. It also said the government was unlikely to hit its 2011 budget deficit target of 7.5 percent of G.D.P. “We believe that the government has not tightened spending controls sufficiently to prevent further accumulation of arrears in 2011,” it said. “Government revenues have been underperforming budgetary expectations, most recently in the current quarter.” It added that prospects for better tax collection remained uncertain due to the impact of weaker domestic demand and persisting inefficiencies of the tax administration. A version of this article appeared in print on March 30, 2011, in The International Herald Tribune. To see original article CLICK HERE

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