Portugal and Greece were downgraded by Standard and Poor's, which said the European Union's new bailout rules may mean both nations eventually renege on their debt obligations.
S&P cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-, three steps below Ireland. Greece's rating fell two grades to BB-, three levels below investment grade. S&P cited concerns that both countries will be forced to restructure debt after seeking European aid.
The moves increase pressure on European policy makers trying to stem the sovereign-debt crisis almost a year after Greece became the first euro member to seek a bailout. Even as Portuguese prime minister Jose Socrates repeatedly denies his country needs help, investors are increasing bets that it will be forced to follow Greece and Ireland into seeking aid from the European Financial Stability Facility.
"It only accelerates the inevitable move to calling the EFSF for Portugal," said Glenn Marci, a strategist at DZ Bank AG in Frankfurt.
New rules on bailout loans mean sovereign-debt restructuring is a "potential pre-condition" to borrowing from the future European Stability Mechanism which is "detrimental to commercial creditors", the rating company said.
The gap between Portuguese and German borrowing costs surged to 467 basis points today. The Greek spread widened to 938 basis points from 934 basis points yesterday.
Bloomberg
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