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Portugal and Greece downgraded by S&P

The bond-rating agency attributes its moves to the likelihood that both nations will renege on their debts because the European Union's new bailout rules ensure that governments will be paid back before other creditors.

March 29, 2011|Bloomberg News

Portugal and Greece were downgraded Tuesday by Standard & Poor's, which said the European Union's new bailout rules may mean both nations eventually will renege on their debt obligations.

S&P cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-, three steps below Ireland. Greece's rating fell two grades to BB-, three levels below investment grade. S&P cited concerns that both countries may be forced to restructure debt after seeking European aid and that governments will be paid back before other creditors.

The moves increase pressure on European policy makers trying to stem the sovereign-debt crisis almost a year after Greece became the first euro member to seek a bailout. Even as Portuguese Prime Minister Jose Socrates repeatedly denies his country needs help, investors are increasing bets that it will be forced to follow Greece and Ireland into seeking aid.

"The downgrades intensify the pressures facing peripheral economies, Portugal in particular," said Neil Mackinnon, an economist at VTB Capital in London and a former British Treasury official. "It increases the likelihood of bailout."

New rules on bailout loans, which take effect in 2013, mean sovereign-debt restructuring is a "potential pre-condition to borrowing from the" future European Stability Mechanism and that senior unsecured government debt will be subordinated to ESM loans. Both changes, announced after a meeting of European leaders in Brussels on Friday, are "detrimental to commercial creditors," the rating company said.

While Portugal "may be able" to obtain emergency loans without restructuring, the priority given to ESM loans "reduces the prospect of timely payment to government bondholders and likely also results in lower recovery values," it said.

S&P had warned when it cut Portugal's rating last week that it may do so again once the details of the ESM were announced.

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