April 5, 2011

Moody’s Cuts Portugal’s Rating, Saying Bailout Need Is Urgent

Rating wasn’t cut even lower because of aid possibility

Despite an auction result that bought time for Portugal as that nation seeks to avoid a bailout and resolve its debt issues independently, Moody’s Investors Service on Tuesday cut Portugal’s sovereign debt rating one more notch to Baa1. The ratings agency said that it thought the country’s incoming government would have to find financing help from the European Union (EU) urgently.

According to Reuters, a report last week published in the International Financing Review opined that Lisbon had bought itself time to resolve the crisis without resorting to a bailout because of a successful bond auction held last week. However, apparently that report carried no weight with Moody’s, which said that the nation’s debt was still under negative review.

In a statement, Moody’s said, "The limited migration of the rating to Baa1 (and not lower) in today's action, reflects Moody's assessment that assistance would be provided by the other members of the euro zone if Portugal needs financing on an expedited basis before it can obtain funds from the European Financial Stability Facility (EFSF). Moody's believes the new government will likely approach the facility as a matter of urgency."

The one bright spot is that Moody’s rating of Portugal is still two notches higher than Standard & Poor’s evaluation. Fitch Ratings, however, rates it one level higher than Moody’s at present.

Jose Socrates, who officially resigned his post as prime minister after the defeat of additional austerity measures but who remains in office in a caretaker capacity, is opposed to bailout. He has said that he will do all he can to help his country avoid having to ask for help from the EU/International Monetary Fund (IMF). Late on Monday he repeated his position for RTP television: "I am committed to the idea of defending Portugal from external aid ... I will do everything to defend Portugal from this scenario."

He might not have the authority to preside over a bailout, however, even if he wanted to. EU finance ministers were to discuss this Friday the question of whether a caretaker government has the authority to request financial help from the EU. The election to replace Socrates and his government is not scheduled till June 5.

Reprints Discuss this story
This is where the comments go.