Sunday 18 March 2018

S&P cuts ratings for Portuguese and Greek debt

A cut for Ireland could follow by the end of the week as agency says lenders risk losses as a result of the new bailout package

Donal O'Donovan

RATINGS agency Standard & Poor's (S&P) last night cut the ratings for Portuguese and Greek government debt. A cut for Ireland could follow by the end of the week.

The ratings agency says lenders to the weakest European countries risk suffering losses as a result of the new European bailout package agreed last week.

The yield, or cost of borrowing, on two-year Greek bonds hit a staggering 15pc on the news. Portugal's cost of borrowing over two years and over 10 years hit euro-era highs yesterday and Irish yields remain close to record levels.

S&P said it thought Portugal and Greece were likely candidates to require rescue deals when the new bailout mechanism came into force in 2013 after bailouts under the current regime end.

Greece is already dependent on a bailout package for funding and Portugal is expected to seek aid within weeks.

If Portugal or Greece do seek aid after 2013 then under the new rules defaulting on some of their own government debt will potential be a pre-condition of accessing EU and IMF support. That is not the case now.

The post-2013 regime is "detrimental to commercial creditors," S&P said. European leaders voted for the new mechanism to end what many see as the free ride private sector lenders have gotten under the current bailout regime.

Ireland was excluded from last night's ratings action but Irish government debt is already subject to a ratings review that will be completed when the result of the bank stress tests are announced tomorrow.

S&P said it thought Portugal was less likely than Greece to end up in default, but that even debt that survived intact would rank below the new bailout loans in the queue to be repaid under the post-2013 regime.

S&P cut Portugal's debt for the second time in three business days to BBB-, the lowest "investment-grade" level. It is one notch above "junk or high yield status", which many investment funds are not allowed to own.

The rating for Greece was cut two grades to BB-. Greek ratings were already at junk level.

ING Bank's Padhraic Garvey said the cuts came because the post-2013 European Stability Mechanism (ESM) accelerated the likelihood of a default by one of the bailed out countries, even if it did not actually increase the risk of default.

He said he would be surprised if Ireland's rating was not downgraded when bank stress tests were completed later this week.

Yesterday the difference between Portuguese and German borrowing costs surged to 4.67 pc. The Greek spread widened to 9.38pc yesterday.

Meanwhile, Portugal's own central bank said the economy there would shrink more than previously forecast in 2011 and grow less than estimated next year as austerity measures bite.

Irish Independent

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