Moody's downgrades Portugal as bailout looms

Moody's Investors Service on Tuesday followed the path of its rivals Fitch and Standard & Poor's in cutting Portugal's credit ratings, citing the likelihood of the country asking for external help to solve its debt crisis as its bond yields hit yet new euro-era highs.

Moody's lowered Portugal's long-term sovereign rating by one notch to Baa1 and kept it on review for a possible further downgrade. "Moody's rating action was driven primarily by increased political, budgetary and economic uncertainty," the agency said in a statement, adding that it expects whichever party wins the June 5 general election to tap the emergency European Financial Stability Facility "as a matter of urgency."

The latest ratings action came as the spread between the benchmark 10-year Portuguese government bond and the German equivalent hit 522 basis points, the highest level since the European single-currency bloc was established in 1999. The yield on the five-year bond moved above 10 percent for the first time ever.

Moody's said the current borrowing costs of the government were approaching unsustainable levels, even for short-term debt. "It is very unlikely that the long-term debt markets will reopen to the Portuguese government or the Portuguese banks to any meaningful extent until the government is able to take action to dispel doubts over its commitment and ability to implement (its) fiscal program," the agency said

The debt management agency IGCP will look to sell between 750 million and 1 billion euros in six- and 12-month Treasury bills on Wednesday. It is expected to have to pay a rate of 6 percent for the one-year paper, levels similar to what investors are asking to hold 30-year Spanish debt.

The latest developments in the Portuguese saga came as Portuguese daily Jornal de Negocios reported that the country's major banks had informed the government they would no longer buy the country's debt and urged the administration to seek a short-term loan to guarantee its solvency.

As defiant as ever, Prime Minister José Sócrates said external assistance was the "last resort and everything would be done to avoid that happening." The European Commission yesterday denied it was in talks with the government on a short-term loan to be disbursed prior to the elections.

Sócrates resigned on March 23 after parliament rejected his Socialist government's latest deficit-reduction proposals. In an interview with state broadcaster RTP, Sócrates said the rejection of the measures to reduce the shortfall in the government's books to 4.6 percent of GDP this year and 3 percent the following year had made things "more difficult" for the country.