S&P downgrades Portugal and Greece - Financial Times

By David Oakley, Peter Wise and Kerin Hope

Published: March 29 2011 16:55 | Last updated: March 29 2011 19:41

Standard & Poor’s has cut Portugal’s credit rating to one level above junk status on concern that commercial investors would suffer under the terms of a Europe-led financial rescue.

Tuesday’s downgrade, the second in a week, comes after the fall of the Socialist government plunged the country into a political crisis. It sent Portugal’s borrowing costs soaring.

Shares in Portuguese banks also fell sharply as S&P said it would assess the impact on lenders of its cut in the country’s sovereign rating. The agency cut the ratings of five Portuguese banks on Monday.

S&P cut Portugal’s rating to the lowest investment grade of triple B minus. Another downgrade to junk would have far-reaching implications for Lisbon as many investors can only buy investment grade bonds.

Greece also saw its ratings cut two grades to double B minus, three levels below investment grade.

S&P said the downgrades reflected the likelihood that the countries would have to seek financial assistance from European Union rescue funds under terms that would be detrimental to commercial investors.

Portuguese 10-year bond yields, which have an inverse relationship with prices, leapt above 8 per cent for the first time to a euro-era high before easing back to 7.99 per cent. Greek 10-year yields jumped to 12.70 per cent. Irish yields also rose to 10.12 per cent.

Spanish bond yields were untroubled due to a belief that Madrid can turn round its economy without external help.

EU policymakers agreed to create a more orderly process for sovereign defaults by introducing collective action clauses into all eurozone bonds that make clear private creditors will share the burden of defaults from July 2013.

They also agreed to plans to create a permanent rescue fund, the European Stability Mechanism, from that date.

That has prompted some fund managers to warn they will not buy Greek, Irish or Portuguese bonds because of the greater default risks, although volumes were extremely low already with other investors refusing to buy this debt.

The Portuguese cut followed S&P’s two-notch downgrade of Portugal’s long-term rating from A minus to triple B on Friday after a government austerity plan was defeated in parliament, triggering the resignation of José Sócrates, prime minister. More ...