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Pressure on Portugal After New Credit Downgrade

March 16, 2011

nytimes.com

LISBON — Portugal’s borrowing costs pushed higher after Moody’s downgraded the country’s credit rating, stoking the pressure on the country’s beleaguered minority government.

The yield on Portugal’s ten-year bond rose 0.04 percentage point to 7.44 percent. The equivalent yields for Greece and Spain, two other euro countries struggling with high borrowing levels, were down modestly.

Moody’s Investors Services cut the country’s rating by two notches to A3 late Tuesday, saying the debt-stressed country is struggling to generate growth and faces a tough battle to restore the fiscal health needed to calm jittery financial markets.

Prime Minister Jose Socrates said late Tuesday he would quit if Parliament doesn’t consent to his government’s latest batch of contested austerity measures.

Portugal aims to raise up to €1 billion in a sale of 12-month Treasury bills later Wednesday.

European leaders last weekend agreed on a broad set of measures they hoped would finally contain the continent’s financial difficulties that over the past year have threatened the existence of the single currency.

By increasing the size of the bloc’s bailout reserve and allowing it to purchase government debt, leaders hoped to offset market fears about the euro countries’ fiscal soundness.

But Moody’s said Portugal’s prospects, despite the introduction of long-awaited reforms, remained gloomy as it battled to erase debt and persuade investors to lend it money amid global economic uncertainty.

“The cost of market funding is likely to remain high until the deficit has been reduced to a sustainable level and the prospects for economic growth have improved,” Moody’s said in a statement.

It cut Portugal’s long-term government bond ratings to A3 from A1 and assigned western Europe’s poorest country a negative outlook.

The government has acknowledged that its debt yields — for weeks at more than 7 percent on Portuguese 10-year bonds — are unsustainable in the long term.

Expected higher interest rates and oil prices are further bad news for Portugal’s chances of recovery, Moody’s said.

“Since the external adjustment is likely to take several years to complete, concerns about the growth outlook are likely to persist for some time,” Moody’s said.

The ratings agency also expressed concern about funding for Portuguese banks, noting they had been shut out of markets for more than a year and relied on the European Central Bank for loans. Financial help for them would add to the government’s burden, Moody’s said.

Moody’s praised the government’s austerity measures aimed at lowering a level of national debt that has alarmed markets and prompted investors to charge high rates for lending money to a country viewed as risky.

But the minority government is under fierce political pressure to compromise with opposition parties, which if they voted together could bring down the administration, and with trade unions that have organized a series of strikes over the past year.

Also, commendable plans for labor and legal reform will take years to bear fruit, Moody’s said.

Portugal’s budget deficit hit a record 9.3 percent of gross domestic product in 2009 — the fourth-highest in the eurozone and way above the 3 percent allowed for the countries using the common euro currency. The government says it reduced the deficit to below 7.3 percent last year and is aiming for 4.6 percent this year. European leaders have backed the government’s strategy.

Some analysts fear the austerity measures could backfire as they bite further into Portugal’s weak economic recovery after a contraction in 2009. The Bank of Portugal expects a double-dip recession this year, while the jobless rate has risen to a record 11.2 percent.

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