Portugal downgrade hits European bank shares

Moody’s slashed Portugal’s credit rating by four notches from Baa1 to Ba2 with a negative outlook after markets closed on Tuesday Fears that the eurozone crisis was entering a new stage intensified on Wednesday after Portugal’s credit rating was slashed to junk, with European bank shares falling sharply and some government bonds coming under renewed pressure. Portuguese bank shares tumbled in early trading, while the yield – or interest rate – demanded by traders to hold the country’s debt jumped sharply. UK banks also lost ground, pulling the FTSE 100 down. UK government bonds, known as gilts, benefited, however, as investors looked for a safe haven. The euro lost value against the dollar, dropping nearly one cent to $1.438. Traders were alarmed by Moody’s warning that Portugal – like Greece – will need a second bailout , as it became the first credit ratings agency to cut the country’s debt to junk status. “This will weaken hopes that the recently agreed aid for Portugal will put a line under the nation’s woes and could trigger worries that Portugal could follow Greece down the path of possible default,” said Jane Foley, senior currency strategist at Rabobank, who also stated that the eurozone sovereign debt crisis was “back in full swing”. The yield on the Portuguese 10-year government bond climbed to 12.719% from 12.185% on Tuesday. The yield on the two-year bond leapt by nearly 1.5 percentage points to 14.8%. Irish, Spanish and Greek bond yields were also up. The downgrade is likely to push up Portugal’s borrowing costs when it attempts to auction up to €1bn (£900m) of three-month Treasury bills later on Wednesday. Shares in Portuguese banks Banco BPI dropped 4.7% while Millennium BCP were down 3.8% and Banco Espírito Santo lost 3.6%. In London, the FTSE 100 index traded some 18 points lower at 6006.87, a fall of 0.3%. Royal Bank of Scotland dropped by 1.8% to 38.4p. Moody’s slashed Portugal’s rating by four notches from Baa1 to Ba2 with a negative outlook after markets closed on Tuesday. It is the first agency to rate Portugal below investment grade: S&P has a BBB- rating with a negative outlook, while Fitch has a BBB- rating, on watch for a downgrade. Analysts predicted that credit rating agencies will now turn their attention to Ireland. “For a long time in this crisis S&P were the first mover when it came to downgrading European sovereigns, but it appears that Moody’s are now beating them to the punch,” said Gary Jenkins, head of fixed income research at Evolution Securities. “Maybe S&P have hurt their toe? Anyhow considering the rationale for the Portuguese downgrade we are wondering who is going to be the first to cast their beady eye over Ireland’s rating.” Major eurozone banks are meeting in Paris on Wednesday to try to finalise a plan for investor participation in a second Greek bailout . Michael Hewson of CMC Markets warned that traders are also concerned about Italy, where “services are showing signs of contraction, in the face of some budget tightening and political uncertainty”. European debt crisis European banks Europe Portugal Bonds Ratings agencies Julia Kollewe guardian.co.uk

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