International

Amid Political Turmoil, One Agency Downgrades Portugal's Credit Rating

Portuguese Prime Minister Jose Socrates speraks during a presser after an EU summit. i

Portuguese Prime Minister Jose Socrates speraks during a presser after an EU summit. Jean-Christophe Verhagen/AFP/Getty Images hide caption

itoggle caption Jean-Christophe Verhagen/AFP/Getty Images
Portuguese Prime Minister Jose Socrates speraks during a presser after an EU summit.

Portuguese Prime Minister Jose Socrates speraks during a presser after an EU summit.

Jean-Christophe Verhagen/AFP/Getty Images

Last night, Standard & Poor's downgraded Portugal's credit rating to BBB, which, as the Financial Times reports, is "is the lowest rating attributed by any rating agency, bringing Portugal's credit standing closer to junk status."

If you remember, Wednesday, Prime Minister Jose Socrates tendered his resignation after parliament refused to pass a set of austerity measures Socrates said were essential to reign in the country's debt problem.

As the Financial Times puts it, if other rating agencies follow the S&P's lead, Portuguese banks could face a liquidity crisis. The FT goes into what this means in detail, but essentially what's going on is what happened to Ireland last year: Portugal's credit isn't good enough to borrow money from the capital markets, so they borrow from the European Central Bank, which will lend it money as long as one credit agency gives it an A-level rating.

If Portugal's ratings continue to fall, they could potentially not be able to borrow from the European Central Bank and would need a bailout like Ireland.

The political turmoil, reports the Wall Street Journal, is complicating matters, because new elections can be held no sooner than 55 days after an announcement is made. Reuters reports that a European Union crisis package had to be put on hold after the prime minister's resignation. The Wall Street Journal goes on:

But time is running out for Portugal, as its funding costs continue to rise, making it unclear whether the country will be able to survive alone until April, when it must repay €4.23 billion ($5.95 billion) in debt. Currently it has cash reserves of about €4 billion.

The ratings firms Standard & Poor's and Fitch Ratings both cut Portugal's debt two notches Thursday.

A bailout would make the country the third among the 17 nations that use the euro to apply for help from other members of the EU and the International Monetary Fund, after Greece and Ireland.

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