Portugal's credit rating just above junk status

STANDARD & POOR’S has cut Portugal’s credit rating to one level above junk status on concern that commercial investors would suffer under the terms of a Europe-led financial rescue.

Yesterday’s downgrade, the second in a week, comes after the fall of the Socialist government plunged the country into a political crisis.

It sent Portugal’s borrowing costs soaring.

Shares in Portuguese banks also fell sharply as S&P said it would assess the impact on lenders of its cut in the country’s sovereign rating. The agency cut the ratings of five Portuguese banks on Monday.

S&P cut Portugal’s rating to the lowest investment grade of BBB-. Another downgrade to junk would have big implications for Lisbon as many investors can only buy investment grade bonds.

Greece also saw its ratings cut two grades to BB-, three levels below investment grade.

S&P said the downgrades reflected the likelihood that the countries would have to seek financial assistance from EU rescue funds under terms that would be detrimental to commercial investors.

Portuguese 10-year bond yields, which have an inverse relationship with prices, leapt above 8 per cent for the first time before easing back to 7.99 per cent. Greek 10-year yields jumped to 12.70 per cent. Irish yields also rose to 10.12 per cent.

Spanish bond yields were untroubled due to a belief that Madrid can turn round its economy without external help.

The Portuguese cut followed S&P’s two-notch downgrade of Portugal’s long-term rating from A- to BBB on Friday after a government austerity plan was defeated in parliament. – (Copyright The Financial Times Limited 2011)