Greece: Fears of debt contagion see Portugal’s bonds downgraded to junk

5th July 2011

The news was reported on Tuesday evening on FT Alphaville.

John McDermott writes that Moody's offers two main reasons for the downgrade, the most obvious being "Portugal's ongoing high-debt-low-growth mash-up".

The other reason is more interesting. "Moody's writes that the "voluntary" involvement of private creditors in Greek bailout efforts bodes ill for Portugal's ability to access capital markets. It suggests that bondholder burdensharing would be a precondition of future lending to Portugal, which in turn would scare off new creditors."

The New York Times reports that heightened concerns "Portugal will not be able to fully achieve the deficit reduction and debt stabilization targets set out in its loan agreement with the European Union and International Monetary Fund" led to Moody's decision.

It adds: "Portugal is facing formidable challenges in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system".

Moody's is the first of the Big Three ratings agencies to put Portugal's credit in junk status. Standard & Poor's and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range

Earlier in the week Standard & Poor's, the credit rating agency, said French and German banks' plan to roll over their holdings of Greek debt amounted to a default.

More on Mindful Money:

Economist Shaun Richards gives his take on events in his blog here.

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