Warning issued to Portugal and Greece

The debt ratings of Portugal and
Greece remain at risk of being cut due to concern about how a European Union
rescue fund may affect holders of the two nations’ sovereign bonds, Standard
& Poor’s said.

The ratings company kept Portugal’s
A- long-term, A2 short- term and Greece’s BB+ long-term ratings on creditwatch
negative.

 It cited Portugal’s “high external financing
need and limited funding sources.”

Policymakers in both nations have
cut wages and raised taxes to convince investors they can rein in their budget
gaps.

The efforts have failed to lower
borrowing costs, with the extra yield investors demand to hold 10-year
Portuguese debt over its German equivalents nearing a euro-era record on
concern Portugal may need to follow Greece in seeking a bailout.

While the Portuguese government
“has progressed its fiscal stabilization and economic reforms in recent
months,” the nation “could find itself forced to approach” the European Union’s
rescue fund and the International Monetary Fund, S&P said in a statement.

The ratings company in a separate
report said it’s closely monitoring Greece’s progress in following through on
its fiscal reforms.

S&P placed Portugal on
CreditWatch negative on 30 November and Greece on 2 December.

The main risk to the credit
standing of the two nations is the outcome of discussions surrounding the
European Stability Mechanism, according to the reports.

S&P may downgrade both ratings
if Europe’s leaders in late March decide to require borrowers to restructure
their government bonds and make the ESM a preferred creditor, “effectively
subordinating government bond holders,” the rating company said.

Neither country’s debt grade is
likely to be lowered by more than two notches, the reports said.

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