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Moody’s Warns It May Cut Portugal’s Rating

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SINGAPORE—Moody’s Investors Service Tuesday warned it may lower Portugal’s credit rating by as much as two notches, dealing another blow to investor confidence in the euro zone.

Moody’s warning came less than a week after the ratings agency said it may downgrade its ratings on Spanish government debt. It also came as Prime Minister José Sócrates said he was “very satisfied” with the government’s latest budget figures, which showed the central government deficit narrowing for the first time this year.

Moody’s also said that the euro zone “retains significant financial strength” and has the “resources, incentives, and political cohesion” needed to contain the sovereign debt crisis. “We believe that policy makers have sufficient resources and will use them as necessary to restore financial stability,” the ratings agency said in a report.

Moody’s said that all its euro-zone sovereign ratings with the exception of Greece are investment grade, reflecting its view that “the risk of a euro-zone sovereign default is very small.”

Moody’s statement on portugal knocked the euro against major rivals. The common currency fell against the U.S. dollar and the yen early in European trading hours, having rallied in Asian trading after China expressed support for the euro-zone’s efforts to stabilize financial markets. The euro was recently at $1.3155, down from the day’s high of $1.3202. The yield spread between Portuguese 10-year government bonds and the benchmark German bund edged slightly higher, to 3.538 percentage points.

In putting Portugal’s A1 long term and Prime-1 short-term government bond ratings on review, Moody’s cited uncertainties over the longer-term health of Portugal’s economy, which could suffer from the government’s fiscal austerity plans. It also doubted Portugal’s ability to access capital markets at a sustainable price.

“In Moody’s opinion, Portugal’s solvency is not in question,” said Anthony Thomas, Moody’s vice president and lead analyst for Portugal. “But the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy’s ability to withstand fiscal consolidation and private sector deleveraging mean its outlook may no longer be consistent with an A1 rating.”  Read More in The Wall Streat Journal.

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Written by Theophyle

December 22, 2010 at 9:36 am

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