Credit rating agency Moody's has cut Portugal's sovereign debt by one notch, saying it believed an incoming government would need to seek financing support from the European Union as a matter of urgency.
The cut in Portugal's long-term rating to Baa1 from A3 still leaves Moody's evaluation of its debt two notches higher than fellow agency Standard and Poor's but a notch below that of Fitch Ratings.
Moody's said the debt was still under negative review, with further downgrades dependent on Lisbon's ability to secure medium-term funding.
"The limited migration of the rating to Baa1 (and not lower) in today's action, reflects Moody's assessment that assistance would be provided by the other members of the euro zone if Portugal needs financing on an expedited basis before it can obtain funds from the European Financial Stability Facility (EFSF)," Moody's said in a statement.
"Moody's believes the new government will likely approach the facility as a matter of urgency."
The country plans to sell as much as €1 billion of six- and 12-month bills tomorrow.
The cost of protecting against a Portuguese default rose to a record, surpassing the price for Irish debt insurance for the first time in seven months. Credit-default swaps on Portugal's bonds climbed 12 basis points to 592, implying a 41 per cent probability the government will renege on its debts within five years, according to CMA.
Contracts tied to Ireland's notes dropped 11.5 basis points to 587.
Euro zone sources said that finance ministers will discuss Portugal's options for resolving its debt problems under a caretaker government, including whether it is capable of requesting EU financial aid, at meetings on Friday.
Financial markets are convinced Lisbon will have to follow Greece and Ireland in asking the European Union and International Monetary Fund for a bailout, but the situation has been complicated by the fall of the government in Lisbon.
Caretaker prime minister José Sócrates, who resigned after parliament rejected a fresh round of budget austerity, has made it a point of honour not to accept EU/IMF help and the country may remain in limbo until an election set for June 5th.
"I am committed to the idea of defending Portugal from external aid ... I will do everything to defend Portugal from this scenario," Mr Sócrates told RTP television late yesterday.
While Portugal can probably go on funding itself for the next eight weeks - it has to refinance €4.3 billion of debt in April and €4.9 billion in June - the cost of doing so is likely to go on being punitively high.
Reuters, Bloomberg
