Moody’s Cuts Portugal’s Credit Rating

Moody’s Cuts Portugal’s Credit Rating
By JAMES KANTER
Copyright by The New York Times
Published: July 13, 2010
http://www.nytimes.com/2010/07/14/business/global/14euro.html?_r=1&hpw


BRUSSELS — Portugal’s credit rating was cut two notches Tuesday by Moody’s Investors Service, lending urgency to the discussions of E.U. finance ministers about how banks would be affected if a government were to default on its debts.

Moody’s said it was cutting Portugal’s sovereign bond ratings to A1 — still investment grade — from Aa2. It noted that the national debt had risen sharply relative to gross domestic product as a result of spending on economic stimulus measures, and it warned that weak growth would weigh on government finances for two or three more years.

The Portuguese Finance Minister Fernando Teixeira dos Santos said the downgrade, which followed cuts by other rating agencies, was expected.

“There is no point grieving over this,” Mr. Teixeira dos Santos was quoted as saying by The Associated Press in Lisbon. “We have to do what the markets demand, which is swiftly put our public finances in order.”

Meanwhile, officials in Brussels were discussing for a second day how many details to release from bank stress tests when the data are made public July 23. The tests are meant to reassure investors that a safety net of €750 billion, or nearly $1 trillion, will be enough to calm the debt crisis. But the results could also push banks to seek extra financing to increase the cushion against potential losses.

“The European banking sector is, over all, resilient,” Olli Rehn, the European commissioner for economic and monetary affairs, said Monday night. “At the same time, when we publish the stress tests we will have to prepare for any pockets of vulnerability.”

The euro fell slightly against the dollar Tuesday, partly on concerns about the results of the stress tests and warnings that more needed to be done to clarify how they were being conducted. But stocks rose, with the Stoxx Europe 600 index gaining 1.6 percent by early afternoon.

Countries in the European Union, along with the International Monetary Fund, created the superfund earlier this year to ease fears about mounting debt in Europe.

Some governments want the fund to be available for banks that fail their stress tests and that are unable to recapitalize in the markets.

Slovakia, however, has held up the formal activation of the fund. Its new government has sought negotiations on how much it will contribute.

Jean-Claude Juncker, head of the group of euro zone finance ministers, said that the issues raised by Slovakia could be resolved and that the fund would be “available without any doubt by the end of the month.”

Much of the concern in Europe has been about the Spanish banking sector, where the implosion of a housing bubble helped set off a deep recession and ensuing concern about the public finances.

But on Monday, the Fitch ratings agency said that even under extreme stress, Spain’s national fund for restructuring its banking sector would be more than adequate to cover potential losseson the domestic loan portfolio.

Mr. Rehn offered additional encouragement to Spain, saying that he expected “the same competent teamwork and resilience will be seen in the Spanish economy and its reforms” as had been displayed by the nation’s victorious soccer team Sunday night.

The stress tests on the health of 91 banks are being carried out by the Committee of European Banking Supervisors, which is made up of national regulators from across the European Union.

The list of banks includes most of the German Landesbanks, which have close ties to local governments, as well as numerous Spanish thrift institutions, or cajas.

Both categories are regarded as vulnerable, and investors and analysts have sought more detailed information on their holdings and liabilities.

The largest multinational banks in Europe will also be tested, including HSBC and Barclays in Britain, Deutsche Bank and Commerzbank in Germany, and Société Générale and BNP Paribas in France.

Banks in some Eastern European countries will be tested, including Poland, Slovenia and Hungary.

David Jolly contributed reporting from Paris.