Standard & Poor’s (S&P) downgraded its credit ratings on struggling Greece and Portugal on Tuesday, saying that investors in their bonds could lose out under the terms of a new eurozone bailout system.
S&P cut Portugal by one notch to BBB-, having slashed its rating only last week on fears Lisbon would have to seek a bailout after the government fell when parliament rejected austerity plans aimed to balance the public books.
Greece was cut by two notches to BB-. Both countries have been hit by a series of downgrades in the past few months as the money markets bet that they will have to restructure their debt at the expense of investors.
S&P, one of the top three ratings agencies, said Tuesday’s downgrades reflected its concerns that a new eurozone debt rescue system agreed at an EU summit last week would be to the detriment of creditors.
The EU summit confirmed “expectations that (i) sovereign debt restructuring is a possible pre-condition to borrowing from the European Stability Mechanism (ESM), and (ii) senior unsecured government debt will be subordinated to ESM loans,” S&P credit analyst Marko Mrsnik said in a statement.
“Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers,” Mrsnik said.
Investors could see their investments restructured, either in terms of the amount they get repaid or the time they have to wait for repayment. In either event, their investment would be worth less and they would need to get higher rates of return if Athens or Lisbon tried to raise fresh money.
S&P also warned that weaker-than-expected growth or political problems could undermine Lisbon’s efforts to stabilize its public finances, which justified its decision to put the Portugal ratings on negative outlook.
Outgoing Portuguese Prime Minister Jose Socrates remained defiant, saying Portugal remains very determined to not seek an -international bailout despite mounting pressure from the markets.
“The government doesn’t have any intention of doing that. We are very determined that that doesn’t happen,” Socrates told journalists after the rating decision sent the government’s borrowing costs even higher.
“Put simply, the situation is aggravated. For our banks, our economy, our republic,” Socrates said.
Athens also reacted sharply to the latest S&P downgrade, calling it unbalanced and unjust as it failed to take key European support decisions into account.
“This seems to be an unbalanced and unjust assessment for a number of reasons,” the Greek finance ministry said in a statement. “It reflects neither the effort made to date and the achievements nor Greece’s economic prospects.”
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