Debt-burdened Portugal had to pay sharply higher returns on Friday to raise fresh funds as Fitch Ratings Ltd slashed its ratings on concerns upcoming elections will make life even more difficult for the country.
The Portuguese national debt agency said it raised 1.645 billion euros (US$2.33 billion) in one-year bonds at an average yield — the return paid to buyers — of 5.793 percent, up from 4.331 percent at a similar sale on March 16.
Although analysts said they had expected Lisbon to have to pay even more, anything above 5 percent on short-term debt is very high, with the markets betting Portugal will need external help to overcome its debt problems.
Rates on benchmark Portuguese 10-year bonds have jumped above 8 percent, an unsustainable level for the long-term, since the Portuguese parliament rejected the government’s latest austerity package last week, forcing new elections and a series of sharp rating downgrades.
They rose to 8.409 percent late on Friday after Fitch downgraded Portugal’s rating, from 8.304 percent on Thursday, a new record high for Lisbon’s 10-year bonds since the country joined the eurozone.
Fitch said it slashed its credit rating on Portugal by three notches to BBB- because with the election campaign under way, the country would be less likely to secure outside help, after fellow struggling eurozone members Greece and Ireland were bailed out last year.
“The severity of the downgrade by three notches mainly reflects Fitch’s concern that timely external support is much less likely in the near term following [Thursday’s] announcement of general elections to take place on June 5,” said Douglas Renwick, director in Fitch’s Sovereign Ratings Group.
“The agency views external support as necessary to bolster the credibility of Portugal’s fiscal consolidation and economic reform effort, as well as secure its financing position,” he added.
Fitch’s downgrade, just the latest in a series of damaging moves by the top three ratings agencies, makes it more difficult for Lisbon to raise fresh funds at acceptable cost to cover its debt obligations.
Figures on Thursday showed that Portugal chalked up a deficit equal to 8.6 percent of GDP last year, way above its target of 7.3 percent and making it even more unlikely it will meet this year’s goal of 4.6 percent.
The EU public deficit limit is 3 percent. Fitch said the upward revisions of the deficit figures “further weakened Portugal’s fiscal profile and underscores the magnitude of the fiscal consolidation challenge facing the new government.”
Meanwhile, saying that investors in its bonds could lose out under the terms of a new eurozone bailout system.
At the same time, Standard & Poor’s removed its Ireland ratings from “creditwatch with negative implications” and gave the eurozone country a “stable” outlook — meaning that a further downgrade is unlikely in the short term.
“The stable outlook reflects our view of the balanced risks to Ireland’s creditworthiness,” it said in a statement.
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