Portugal rating gets cut again by Moody's

[April 05, 2011]  LONDON (AP) -- Moody's downgraded Portugal's debt rating for the second time in less than a month Tuesday and warned that the debt-laden euro country may suffer another cut soon because of heightened political, budgetary and economic uncertainties.

The agency said it has cut its rating on Portugal's bonds by one notch to Baa1 from A3 and placed the rating on review for another downgrade. If Portugal's debt rating is cut by a further three notches to Ba1, then its bonds would be considered junk.

Moody's said the range of difficulties, including the upcoming general election on June 5, increase the risk that Portugal will be unable to achieve the outgoing government's ambitious deficit reduction targets over the coming three years and put the public finances into shape.

Moody's also said the recent agreement to replace the current bailout fund with the European Stability Mechanism from 2013 also acted as a trigger for the downgrade as it contemplates the possibility of a debt restructuring within the euro area.

Though the election following last month's resignation of the previous government complicates how Portugal can tap the EU's current bailout fund, Moody's reckons other countries in the eurozone would provide Portugal with help if required in the interim period.

However, once the election is out of the way, Moody's said it expects the new government will "likely approach the facility as a matter of urgency."

Approaching its partners may become inevitable if Portugal's ability to tap bond market investors dries up. The country faces a couple of key tests over the coming months. As well as having to repay a euro4.5 billion loan in April, it has an almost euro5 billion bond repayment two months later.

Moody's said it's "very unlikely" that the long-term debt markets will reopen to the Portuguese government or to the Portuguese banks to any meaningful extent until the government can take action to dispel doubts over its commitment and ability to implement its adjustment program.

The downgrade further illustrates the difficulties Portugal is facing if it is to avoid joining Greece and Ireland in seeking a financial rescue package. With the country's borrowing costs seemingly hitting a record euro-era high on a daily basis, investors think it's becoming increasingly unlikely that Portugal will be able to deal with its problems on its own.

By early morning, the yield on Portugal's ten-year bonds were up a further 0.04 percentage point to a prohibitive 8.63 percent.

Moody's said it believes that the government's current cost of funding is "nearing a level that is unsustainable, even in the short-term."

[Associated Press; By PAN PYLAS]

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