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S&P downgrades Portugal and Greece

Standard & Poor’s Ratings Services has downgraded both Greece and Portugal, dropping Greek bonds below investment grade.

The move has been met by a drop in the FTSE by 2.06 per cent, the Dow Jones dropped 1.18 per cent. The Euro has also fallen to €1.33 against the US dollar.

The ratings agency downgraded the long-term ratings of Portugal to ’A-’ from ’A+’ and long-term ratings of Greece to ’BB+/B’ from ’BBB+/A-2’, which drops Greek bonds to junk status.

The downgrade means Greek bonds can no longer be used as collateral for borrowing from the European Central Banking.

S&P says it has downgraded Greece because medium-term financing risks related to its government’s high debt burden are growing “despite the government’s already sizable fiscal consolidation plans”. It predicts that the Greek debt-to-GDP ratio will reach 124 per cent of GDP in 2010 and 131 per cent of GDP in 2011.

Last week the Greek government called on a €40bn International Monetary Fund ECB loan after increased market pressures on its sovereign debt.

S&P credit analyst Marko Mrsnik says: “The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory.”

The ratings agency says for Portugal to reach its current consolidation targets, the Portuguese government would need to implement fiscal consolidation “over and above” its current plans.

The Portuguese government deficit rose to 9.4 per cent of GDP in 2009 from 2.7 per cent in 2008. While it has planned to reduce this to 4.1 per cent GDP by 2013, S&P says its budget deficit is set to rise from 66 per cent of GDP in 2008 to 95 per cent in 2013.

S&P credit analyst Kai Stukenbrock says: “The two-notch downgrade reflects our view of the amplified fiscal risks Portugal faces. We expect the Portuguese government could struggle to stabilize its relatively high debt ratio over the outlook horizon until 2013. Portugal’s public finances in our view remain structurally weak, notwithstanding the government’s substantial public sector reforms of recent years.”

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