Analysis: Portugal poisoned by Greece in cut to the status of junk (Reuters)

Lisbon (Reuters)-a downgrade of Portugal to the status of junk underlines how the Greek crisis is poisoning by other weak countries in the euro area, regardless of their efforts to reduce their debt and return to growth.

Moody's Investors Service's on Tuesday became the first credit rating agency cut the Portugal under investment grade, causing the bond yield of 10 years of the Portuguese Government to jump more than 1 percentage point of euro-levels was.

The Agency cited concerns that administrative problems and sluggish economic growth could prevent the Portuguese Government to hit ambitious goals to shrink its budget deficit for the next three years under an international bailout 78 billion.

But Moody's also said the European Union's efforts to get private investors to bear the burden of supporting Greece, through a "voluntary" rollover of maturing Greek debt, has threatened investor confidence in Portugal as well.

If investors believe the EU can follow the Greek model and pressure them into bearing part of the cost of future aid to Portugal, they become less willing to lend to Lisbon, reducing the chance that they can resume borrowing from the market in 2013 as expected, Moody's said.

The example of Greece, malignant rather than everything that happened in Portugal in recent months, seems to be that the main reason for the decision by Moody's cut its rating four notches Lisbon, other analysts said.

"I think the main problem is growth internally and on that side not much has changed," said Diego Iscaro, Economist at IHS Global Insight. "Four notches is perhaps more to do with the developments throughout Europe.

"The Moody's concern is that we could see a repeat of Greece with Portugal next year. It is a different situation, but what he is saying that Moody's is that the resolution with the private sector can be the same. "

SWITCH WITH IRELAND

Moody's downgrade means that many investors will now view Portugal as the greatest danger of the eurozone after Greece instead. Until recently, that the position was held by Ireland, which is still rated as investment grade from all three main agencies; perceptions began to change when the yield of the bond of 10-year yield rose over the Irish in mid-June.

Moody said that there was a growing risk that Portugal would need a second international rescue, the 78 billion emergency loans which are due to flow in 2013. The size of any further rescue would depend on how long the EU needed to keep afloat the Portugal.

Under current plans, Lisbon is expected to raise 10 billion in long-term bonds in 2013 and 6 billion the following year, Iscaro said. Financing so Portugal until the end of 2014 may require an additional 16 billion euros of loans – depending on many factors including the success of Lisbon in cutting its budget deficit and the sale of State assets.

Iscaro said it was only likely to become apparent around the third quarter of next year, if Portugal would need a new rescue plan.

But Citibank, in a report Wednesday, said a second rescue plan was likely.

"Portugal is likely to require a second package at some point in 2012, when the International Monetary Fund is likely to take additional measures to bridge the financing gap for 12 months ahead-as was the case in Greece," he said.

Many economists based on Portugal at odds with Moody's downgrade, alleging that the Agency had not paid enough attention to the determination of the new centre-right Government of Lisbon meeting fiscal goals set by the EU and the International Monetary Fund.

The Government, which took office last month, has already announced a special tax on year-end bonuses and promised to accelerate the spending cuts over the terms of the bailout plan, which was agreed before the June 5 general election.

"We think this cut by Moody's was absurd and out of time. Didn't consider also measures the new Government and did not wait for the first evaluation of the implementation of austerity, "said Filipe Silva, head of debt to Banco Carregosa, a Portuguese private bank.

But as long as the Greek crisis suggests to investors that they may be forced to restructure their holdings of debt in the euro area countries, the success of Portugal with internal fiscal reforms may fail to impress the markets or the rating agencies.

Richard McGuire, interest rate strategist at Rabobank, said Moody's downgrade had stressed that "in terms of ' Domino ' restructuring, Portugal is the perfect man standing."

"Perspective, or even mere speculation, a series of defaults will increase the risk of spread of the infection," said McGuire.

(Edited by Andrew Torchia)

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