Standard & Poor's announced Tuesday that it had downgraded its sovereign credit ratings for Portugal and Greece. The move compounds the existing pressure on the nations as they both attempt to work through extreme debt, feeble economies and the threat of the Euro’s collapse.
Portugal’s rating is now BBB- , formerly BBB, with a negative outlook. The downgrade, it’s second in under a week, leaves Portugal with the lowest investment grade rating at the agency. The downgrades come in the aftermath of the collapse of the Portuguese government last week when Parliament was unable to grant additional funds and measures to compensate for the deficit leaving Portugal to ask for foreign aid. The S&P rating correlates to the approaching necessity for an international bailout. Lisbon has roughly €9 billion, or $13 billion, in bond redemptions due in April and June. While analysts believe Portugal’s current cash position may be enough to fulfill April’s redemption, the redemption in June will likely need to be supplemented by foreign help.
Greece, which has been riddled with tremendous debt and received a junk rating last year, has now been cut from BB+ to BB- on worry over potential debt restructuring in the nation.
The aftermath saw European stocks mostly lower alongside higher yields on benchmark euro-zone government bonds. The yield on the Portuguese 10-year note reached 7.8 percent, nearing peak level since the euro first came into use.
S&P expects that Portugal will be forced to rely on the European Stability Mechanism, which is being developed by European countries as several nations, Italy and Greece included, have slipped into dire financial straits as a result of debt.
The S&P justifies that rating on fears the “macro-economic environment could weaken beyond our current expectations,” and that “a political impasse could undermine the effective implementation of Portugal's adjustment program.” Portugal is currently in a tenuous period before elections takes place several weeks from now.
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