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Portugal's Prime Minister Pedro Passos Coelho, right, and Finance Minister Vitor Gaspar listen to a member of the opposition in parliament in Lisbon on July 1, 2011. (RAFAEL MARCHANTE/REUTERS)
Portugal's Prime Minister Pedro Passos Coelho, right, and Finance Minister Vitor Gaspar listen to a member of the opposition in parliament in Lisbon on July 1, 2011. (RAFAEL MARCHANTE/REUTERS)

Portugal poisoned by Greece in cut to junk status Add to ...

A downgrade of Portugal's credit rating to junk status underlines how the Greek crisis is poisoning other weak countries in the euro zone, regardless of their own efforts to shrink their debt and return to growth.

Moody's Investors Service on Tuesday became the first rating agency to cut Portugal below investment grade, causing the 10-year Portuguese government bond yield to leap more than 1 percentage point to euro-era highs.

The agency cited worries that administrative problems and slow economic growth might prevent the Portuguese government from hitting ambitious targets to shrink its budget deficit over the next three years under a €78-billion international bailout.

But Moody's also said efforts by the European Union to have private investors bear part of the burden of supporting Greece, through a "voluntary" rollover of maturing Greek debt, threatened investor confidence in Portugal as well.

If investors believe the EU may follow the Greek model and pressure them into bearing part of the cost of future aid to Portugal, they may become less willing to lend to Lisbon, reducing the chance that it can resume borrowing from markets in 2013 as planned, Moody's said.

The malignant example of Greece, rather than anything that has happened inside Portugal in the past few months, appears to be the main reason for the decision by Moody's to slash Lisbon's rating by four notches, other analysts said.

"I think the main problem internally is growth and on that side not much has changed," said Diego Iscaro, an economist at IHS Global Insight. "So four notches is possibly more to do with Europe-wide developments.

"The concern of Moody's is that we may see a repetition of Greece with Portugal next year. It is a different situation, but what Moody's is saying is that the resolution with the private sector may be the same."

The Moody's downgrade means many investors will now view Portugal as the euro zone's biggest danger spot after Greece. Until recently, that position was held by Ireland, which is still rated as investment grade by all three major agencies; perceptions began to change when the Portuguese 10-year bond yield rose above the Irish yield in mid-June.

Richard McGuire, interest rate strategist at Rabobank, said the Moody's downgrade had underlined that "in terms of 'restructuring dominoes,' Portugal is the next man standing."

"The prospect, or even simple speculation, of a series of defaults will increase the risk of contagion spreading," Mr. McGuire said.

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