Moody's threatens two-point cut of Portugal's credit rating

PORTUGAL WAS put on notice yesterday that its credit rating could be cut and fellow euro zone debtor Spain had to pay more to issue new debt, suggesting the currency bloc’s crisis will rage unabated in 2011.

China, the world’s new economic powerhouse, urged European policy makers to demonstrate as a matter of urgency that they can contain the euro zone’s debt problems and pull the bloc around.

Ratings agency Moody’s said it may cut Portugal’s credit rating by one or two notches within three months, citing weak growth prospects as the government seeks to cut its debt, and climbing borrowing costs.

“The likely deterioration in debt affordability over the medium term and ongoing concerns about the economy’s ability to withstand fiscal consolidation . . . mean its outlook may no longer be consistent with an A1 rating,” said Anthony Thomas, Moody’s lead analyst for Portugal.

The cost of insuring Portuguese sovereign debt against default rose in response and the euro slipped.

Spain cleared its final debt sale of the year, but predictably had to pay a higher price.

The yield on Spain’s three month treasury-bill issue rose to 1.804 per cent from 1.743 per cent on November 23rd, while six-month paper cost 2.597 per cent, up from 2.111 per cent.

The president of the European Council, Herman Van Rompuy, said the EU is ready to do more if needed to ensure the stability of the euro zone area. – (Reuters)