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S&P may downgrade Portugal and Greece

The outcome of a European leaders’ summit this month could determine whether S&P decides to further downgrade both Portugal and Greece’s debt

Portuguese Prime Minister Jose Socrates  - Portugal is one of the most vulnerable economies in the 17-nation eurozone due to its high debt and anemic growth.
Portuguese Prime Minister Jose Socrates - Portugal is one of the most vulnerable economies in the 17-nation eurozone due to its high debt and anemic growth.
Image: Paulo Duarte/AP/Press Association Images

LEADING CREDIT AGENCY Standard & Poor’s has warned that it could further downgrade both Portugal and Greece’s debt in the coming two months, depending on the outcome of a crucial European leaders’ summit later this month.

The agency said in a report Wednesday that it is maintaining its A- rating on Portugal and its BB+ rating on Greece but has kept both countries on so-called “CreditWatch with negative implications.”

Heavily indebted Greece accepted a bailout last year, as did Ireland, and ailing Portugal is widely expected to follow suit even though it managed to raise another €1 billion on Wednesday.

S&P said it could lower the ratings on both countries within the next two months after analysing an expected new European bailout mechanism. EU policymakers are set to decide later this month on the key features of the European Stability Mechanism, which is due to replace the current European Financial Stability Facility from 2013.

It said it was unlikely that either rating would be cut by more than two notches. Even if Portugal was downgraded two notches it would still be investment grade, while Greece’s debt is junk status already.

Eurozone governments have said that private creditors may be included in future financial rescue packages. However, there is still a high degree of uncertainty about how and at what point private creditors might be forced to take losses.

The Portuguese Prime Minister Jose Socrates and German Chancellor Angela Merkel are meeting today in Berlin and the debt crisis is likely to be the main topic of discussion.

The demands are so high that many people think the country will follow both Greece and Ireland in requiring an international financial rescue. That’s most evident in the bond markets, where the yield on Portugal’s ten-year bonds have remained stubbornly above 7 percent for 19 straight trading days — that’s considered potentially unsustainable in the long term.

- AP

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