"Moody’s drops debt rating for Portugal, citing risks; Says a second financial bailout may be needed" July 06, 2011|By David Jolly and Liz Alderman, New York Times
Moody’s Investors Service cut Portugal’s debt rating to junk status yesterday, ratcheting up the pressure on euro zone governments to work out a lasting solution to their financial woes....
Even though Portugal negotiated a $116 billion rescue package in May, the ratings agency cited the risk that the country would need a second bailout before it could raise funds in the bond markets again, and said that private-sector lenders would have to share the pain.
It also warned that Portugal might fall short of the financial targets it worked out with the EU and the International Monetary Fund under the terms of its bailout, because of the “formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth, and supporting the banking system.’’
The downgrade came exactly a month after a general election in Portugal in which voters unseated the Socialist government of Jose Socrates. Since then, the new center-right coalition government, led by the Social Democrats and Prime Minister Pedro Passos Coelho, have pushed ahead with austerity measures and other reforms pledged by Portugal in return for its bailout.
Among such austerity measures, a special tax that will amount to a 50 percent cut on the traditional Christmas bonus given to Portuguese workers....
While the bankers make record bonuses.
The new government has also shelved several infrastructure projects, including a new high-speed train link between Lisbon and Madrid, and has pledged to speed up the privatization of state-controlled companies. Still, proposals like raising taxes will most likely yield more pain for citizens of a country whose economy is forecast to contract 2 percent this year and next.
As a practical matter, the downgrade “means that a smaller universe of investors can hold Portuguese debt on their books,’’ said Carl B. Weinberg, chief economist at High Frequency Economics in New York, referring to rules banning many investment vehicles from holding debt rated below investment grade. Portugal does not have to borrow in the markets, he noted, so the immediate damage to government finances is limited.
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