Portuguese borrowing rate shoots up on debt downgrade

(PARIS) - The cost of borrowing for Portugal shot up on Wednesday shortly after rating agency Moody's downgraded Portuguese debt to speculative status, warning the country might need a new rescue.

The rate charged for lending money to Portugal for 10 years rose to 11.749 percent from 10.755 percent late on Tuesday before Moody's made its statement downgrading the rating from "Baa1" to "Ba2".

The 10-year rate, or yield, on debt issued by Spain rose to 5.563 percent from 5.474 percent late on Tuesday, and on Italian debt to 5.083 percent from 4.993 percent.

Both countries are considered to be potentially at risk owing to the state of their public finances and growth prospects, although unlike Greece, Ireland and Portugal, they are not being rescued.

The rate on Greek 10-year debt eased a fraction to 16.183 percent from 16.186 percent.

Moody's cut the Portuguese rating by four notches and said it might lower the rating further because of the rising likelihood that the country might need a second rescue.

Moody's also expressed concern that the participation of private investors in shouldering part of the cost of a second rescue might be a pre-condition of new official help.

This is an issue of deep concern on financial markets, since any perception that private investors are under duress to participate voluntarily might trigger a default warning on the debt of the country affected. So far, this concern has been focused on Greek debt.

Analysts at French brokers Aurel BGC, commenting on this passage in the Moody's statement, said it meant that the agency "would have to be much more severe regarding countries requesting help from Europe" and that "a downgrading of the sovereign notation would become automatic."

At Credit Mutuel-CIC, strategists said that the decision by Moody's "threatens to re-ignite worries about the strength of the eurozone just as a resolution of the Greek case seemed to be entering a period of respite."

They said: "The face-off between the rating agencies and the European authorities is going to get tougher, as is shown by the latest statements by (German Chancellor) Angela Merkel against S&P (rating agency)."

Merkel warned on Tuesday that governments and international organisations would not allow their freedom of judgement on a Greek rescue to be taken away by the agencies.