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Portugal’s debt downgraded to junk status by Moody’s

European Commission slams rating agencies.

LISBON – The credit ratings agency Moody’s Investors Service has downgraded Portugal’s debt to junk status, according to the BBC. The agency said there was a growing risk the country would need a second bail-out before it was ready to borrow money from financial markets again. Moody’s was concerned that if there was a second bail-out, private lenders might have to contribute.

Portugal, Greece and the Irish Republic were all given bail-out loans to give them time to repair their economies so they could borrow money normally again. But Greece has already had to start negotiating a second bail-out. The agency also said it was concerned that Portugal would not be able to achieve the deficit reduction targets set out as conditions for its first bail-out from the European Union and the International Monetary Fund. It blamed this on “the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system”. Portugal was supposed to cut its deficit to 3% of its gross domestic product by 2013, from last year’s 9.1%.

Lisbon however hit back at Moody’s for downgrading the country’s sovereign debt to junk status, criticising the US rating agency for failing to take into account new austerity measures and a “broad political consensus” in favour of tough fiscal discipline, CNN reported. Vitor Gaspar, finance minister, said the ratings cut to below investment grade failed to reflect the unequivocal support of the main government and opposition parties for the country’s EUR 78 bln financial rescue programme.

Yesterday, the European Commission strongly criticised international credit ratings agencies following Portugal’s downgrade, the BBC said. The Commission said the timing of the downgrade was “questionable” and raised the issue of the “appropriateness of behaviour” of the agencies in general. Com­mis­sion President Manuel Barroso said that the move by Moody’s “added another speculative element to the situation”. He also said it was strange that none of the ratings agencies were based in Europe. “[This] shows there may be some bias in the markets when it comes to the evaluation of specific issues of Europe,” he said.

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