Portugal edges closer to bailout

• Moody’s cuts debt to just three places above junk • Yields on five-year bonds hit 10% • Portugal must refinance €4.3bn of debt this month Portugal moved closer to the brink of a financial rescue package on Tuesday after Moody’s downgraded its debt, pushing its bond yields near to those of Ireland. Moody’s cut its rating on Portugal’s sovereign debt by one notch from A3 to Baa1, just three places above junk. It warned that Portugal is rapidly approaching the point where it will be unable to finance itself. “Moody’s believes that the government’s current cost of funding is nearing a level that is unsustainable, even in the short-term,” it explained. The agency had been expected to downgrade Portugal, following rival rating agencies Fitch and S&P, but the move focused attention on the country’s ability to keep resisting a bailout. The financial markets appear to have priced in a Portuguese bailout as a virtual certainty. Following the downgrade the yield, or interest rate, on Portuguese five-year bonds rose to around 10%, an unsustainably high level. Irish five-year bonds were trading around 10.25% on Tuesday. Last week Portugal admitted that it had missed its target for deficit reduction in 2010 . The country is also gripped by political uncertainty following the resignation of prime minister José Sócrates, whose austerity programme was rejected by the Lisbon parliament. A general election is scheduled to take place on 5 June. Moody’s predicted that the next Portuguese government will seek a rescue package from the European Union and the International Monetary Fund as a matter of urgency. Even before the nation goes to the polls, Portugal must refinance €4.3bn (£3.8bn) of debt this month, with another €4.9bn coming up for renewal in May. It had managed to sell bonds this year, but only by agreeing to pay much higher yields than usual. At Baa1, Moody’s still has a higher rating on Portugal than S&P, which slashed its rating to the brink of junk status in March. Moody’s, though, kept Portugal on negative review, meaning further downgrades are possible. European debt crisis Europe Portugal Ireland Graeme Wearden guardian.co.uk

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