Portugal became the latest in the parade of euro zone nations to be warned by Moody’s that it might be in for a ratings cut. Putting Portugal on review, Moody’s said Tuesday that because of low growth prospects and the high cost to Lisbon for its borrowing, it may drop the country one or two notches after it completes its review.
Reuters reported that the euro lost some of its previous gains when the news hit, while predictably the yield on Portugal’s 10-year bonds over German Bunds rose by 10 basis points to 371 basis points. Its credit default swaps, used to insure against debt default, also went up 10 basis points to 490.
Spain, which according to an Associated Press report was also warned Monday by Moody’s that its banks may be downgraded, saw the yield rise on its bonds in the last scheduled debt issue of 2010. Just last week Moody’s had put the country on review for possible downgrade; now its banks that may need assistance from the state are also in ratings jeopardy.
While demand in the bond sale of 3.9 billion euros ($5.14 billion) was reasonable, yields were up. Three-month bonds carried a yield of 1.804%, up from 1.743% on Nov. 23, and six-month debt, which was 2.111% in November, rose to 2.597%. This was in spite of the fact that Spainhas managed to cut its state deficit by 46% for the first 11 months of the year.
Portugal’s warning was just the latest in a chain of ratings cuts and warnings that included Monday’s advisory by Moody’s about France and one from Standard & Poor’s concerning Belgium. Ireland has already seen its rating fall by five notches, putting it at the third level above junk.