Bloomberg: Portugal, Greece Ratings Kept on Negative Outlook by S&P on Debt Concerns

Portugal, Greece Ratings Kept on Negative Outlook by S&P on Debt Concerns
By Mike Millard and Aki Ito - Mar 2, 2011 12:53 PM GMT+0900

The debt ratings of Portugal and Greece remain at risk of being cut due to concern about how a European Union rescue fund may affect holders of the two nations’ sovereign bonds, Standard & Poor’s said.

The ratings company kept Portugal’s A- long-term, A2 short- term and Greece’s BB+ long-term ratings on creditwatch negative, according to statements released yesterday. It cited Portugal’s “high external financing need and limited funding sources.”

Policymakers in both nations have cut wages and raised taxes to convince investors they can rein in their budget gaps. The efforts have failed to lower borrowing costs, with the extra yield investors demand to hold 10-year Portuguese debt over its German equivalents nearing a euro-era record on concern Portugal may need to follow Greece in seeking a bailout.

While the Portuguese government “has progressed its fiscal stabilization and economic reforms in recent months,” the nation “could find itself forced to approach” the European Union’s rescue fund and the International Monetary Fund, S&P said in a statement. The ratings company in a separate report yesterday said it’s closely monitoring Greece’s progress in following through on its fiscal reforms.

S&P placed Portugal on CreditWatch negative on Nov. 30 and Greece on Dec. 2.

Government Bond Holders

The main risk to the credit standing of the two nations is the outcome of discussions surrounding the European Stability Mechanism, according to the reports. S&P may downgrade both ratings if Europe’s leaders in late March decide to require borrowers to restructure their government bonds and make the ESM a preferred creditor, “effectively subordinating government bond holders,” the rating company said.

Neither country’s debt grade is likely to be lowered by more than two notches, the reports said.

While avoiding a bailout, Portugal is already benefiting from some bond purchases carried out by the European Central Bank. Traders with knowledge of the transactions have said the purchases were focused on Greek, Irish and Portuguese bonds.

Fitch Ratings cut its rating on Portugal on Dec. 23 to A+, the fifth-highest level, from AA- and left its outlook at negative. Moody’s Investors Service put Portugal’s A1 rating on review for a possible two-notch cut because of sluggish economic growth and “the deterioration in debt affordability.”

Greece is rated at Ba1 by Moody’s and BB+ by Fitch, both the 11th-highest debt grades.

To contact the editor responsible for this story: Mike Millard at mmillard2@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Portugal, Greece Ratings Kept on Negative Outlook by S&P on Debt Concerns