Portugal Possibly Following Greece Leads to Moody’s Rating Cut

 July 6 (Bloomberg) -- Moody’s Investors Service cut
Portugal’s credit rating to below investment grade on concern
the southern European country will need to follow Greece in
seeking a second international bailout.
    The long-term government bond ratings were lowered to Ba2,
or junk, from Baa1, and the outlook is negative. Discussions to
involve private investors in a new rescue plan for Greece make
it more likely that the European Union will require the same
pre-conditions in the case of Portugal, Moody’s said in a
statement.
    “That’s very significant because not only does it affect
current investors, but it is likely to discourage new private-
sector lending going forward, and therefore reduce the
likelihood that a country like Portugal will be able to regain
access to the capital markets at a sustainable cost,” Anthony
Thomas, a senior analyst at Moody’s in London, said in a
telephone interview yesterday.
    Portugal is the second euro country rated non-investment
grade by Moody’s, joining Greece, after winning a 78 billion-
euro ($113 billion) international bailout in May.
    European finance ministers last week authorized an 8.7
billion-euro loan payout to Greece by mid-July, basing a second
three-year bailout package on talks to corral banks into
maintaining their Greek debt holdings.
    The euro fell 0.8 percent to $1.4429 at 5 p.m. yesterday in
New York, from $1.4539 the day before, when it touched $1.4578,
the highest level since June 9.
   Portugal’s government debt agency is scheduled to hold a
debt auction today to sell as much as 1 billion euros of bills
maturing in October.
                         Greek Bonds
     Europe is now inching toward a goal of getting banks to
roll over 30 billion euros of Greek bonds, instead of opening a
hole for the official lenders to fill. French banks, with the
biggest holdings in Greece, worked out a rollover formula that
is serving as an example elsewhere, with two options for
bondholders to replace their maturing securities.
     At the same time, Standard & Poor’s said this week the
plan may temporarily place Greece in “selective default” if
implemented.
    Portugal this year joined Ireland and Greece in turning to
the EU and the International Monetary Fund for emergency funding
after their budget deficits ballooned. Moody’s yesterday said it
also based its credit rating cut on risks that Portugal won’t be
able to fully achieve its deficit-reduction target.
    “It’s a reminder that the sovereign debt crisis does not
end with Greece and that risks remain with other nations in
addition to Greece,” said Gary Pollack, who helps oversee $12
billion as head of fixed-income trading at Deutsche Bank AG’s
Private Wealth Management unit in New York.
                         First Driver
    Moody’s said the first driver of its decision was “the
increasing probability that Portugal will not be able to borrow
at sustainable rates in the capital markets in the second half
of 2013 and for some time thereafter.”
    Portugal said the decision by Moody’s ignores the effects
of an extraordinary income-tax charge that was announced last
week. There is a “broad political consensus” backing the
execution of the measures that were agreed upon with the EU,
European Central Bank and International Monetary Fund as part of
the aid program, the Portuguese Finance Ministry said yesterday
in an e-mailed statement.