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A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011.


Moody's has downgraded the credit ratings of nine Portuguese banks, citing increased asset risk resulting from their holdings of Portuguese government debt, the impact of austerity measures and strains on their liquidity.

The move, which affects all Portugal's main banks, comes as European leaders are examining ways of strengthening the continent's financial sector, including a continent-wide recapitalisation plan, amid the deepening eurozone debt crisis.

Moody's also downgraded 12 U.K. banks on Friday.

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The Portuguese downgrades follow a cut by Moody's in the country's sovereign debt rating to junk status in July. The ratings of all but one of the downgraded banks - Spanish-owned Santander Totta - were cut to below junk status.

Moody's said the outlook for all the banks except one - Banco Português de Negócios - was negative, meaning they were at risk of further downgrades.

The rating agency cut the senior debt and deposit ratings of the nine banks by one or two notches. The standalone ratings of six of these banks were also downgraded by one or two notches.

Moody's cited increased asset risk "as a direct consequence of the banks' holdings of Portuguese government debt and the sovereign's downgraded rating".

It said weak economic growth in Portugal, reflecting tough government austerity measures, would also lead to a deterioration of the banks' domestic asset quality.

Portugal's central bank expects the economy to shrink by 2.2 per cent in 2012 after a contraction of 1.9 per cent this year.

Portuguese lenders' lack of access to wholesale funding would also place strains on their liquidity, Moody's added.

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The agency cut the standalone ratings of Banco Espírito Santo, Banco Comercial Português and Banco BPI, by two notches to Ba3, B1 and Ba2 respectively. It downgraded state-owned Caixa Geral de Depósitos, Santander Totta and Montepio Geral by one notch to Ba2, Baa2, and Ba3 respectively.

Under Portugal's €78bn financial rescue programme agreed with the European Union and International Monetary Fund, Portuguese banks can draw on a €12bn fund to shore up their capital.

However, banks have so far avoided using the fund, reluctant to accept what would amount to state ownership of part of their capital.

A senior Portuguese policymaker said lenders were likely to resist using the fund for as long as possible, but would ultimately have little alternative.

Under the bail-out agreement, banks are also required to submit quarterly plans for reducing their lending-to-deposit ratios and strengthening capital.

Moody's said these plans could help restore confidence in the Portuguese banking system, but noted that they also faced "significant implementation risks".

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Increased retail deposits would require an economic upturn and moves to reduce credit-to-deposit ratios would be threatened if market conditions remained fragile, the agency said.

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