Wednesday, March 2, 2011

S&P may still cut Portugal, Greece rating on crisis fund outcome

HONG KONG: Standard & Poor's said on Wednesday it may still cut the sovereign ratings of Greece and Portugal, depending on the details of Europe's crisis fund that euro zone policymakers are discussing, according to Reuters.

The ratings agency's statements were reminders that even though the European sovereign crisis has drifted off the radar screen of global investors as oil prices surge, the fiscal hole that some countries are in could return to haunt markets.

The sovereign ratings of both Greece and Portugal would probably be lowered if the European Stability Mechanism (ESM), the permanent crisis fund that is under debate, makes sovereign borrowers restructure their debt and could put private government bond holders at the back of the line in the case of a default, S&P said in two separate statements.

"This is particularly important for Greece, as we believe that current market dynamics suggest that it is a possible candidate for the ESM funding," the agency said.

Portugal's high external financing needs and limited funding sources also make it a prime candidate to have to tap the European Financial Stability Fund, the crisis mechanism currently in place that will be succeeded by the ESM in 2013.

S&P said that it would be unlikely to cut the debt ratings of Greece and Portugal by more than two notches.

Further details on the ESM could emerge from the European Council in late March. The euro zone's 17 leaders will meet in Brussels on March 11 and bond buybacks are seen by markets and many euro zone countries as a key ingredient to the success of any deal over the politically sensitive ESM.

After falling 6.6% in 2010 for the biggest annual decline in five years, the euro is up year-to-date 2.9%. - Reuters

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