S&P warns of further Portuguese ratings downgrade

Standard & Poor’s warned Monday that it could further downgrade Portugal’s credit rating by a notch this week, after lowering it by two levels last week following the government’s resignation.

“Based on current information and expectations, we could lower our ratings on Portugal again — by another notch,” the ratings agency said in a statement.

That could happen this week, S&P added, depending on the outcome of European discussions on the design of the European Stability Mechanism (ESM), which is being set up to provide support loans to eurozone states in financial distress.

At an EU summit in Brussels on Friday, Prime Minister Jose Socrates insisted that his country did not need a financial rescue even as the cost to raise new funds to cover Portugal’s maturing debt has reached record highs.

S&P also announced Monday it was downgrading five Portuguese banks by two or more notches — publicly-owned Caixa Geral de Depositos and private groups Santander Totta, BES, BPI and Millennium BCP.

That decision was also based on Portugal’s increased policy uncertainty and heightened refinancing risk, the agency said.

“Our rating actions today reflect the direct impact of our two-notch downgrade of the Republic of Portugal on those Portuguese banks’ that we previously rated at the same level or higher than the sovereign,” S&P credit analyst Elena Iparraguirre said in a statement.

“They also are based on the deterioration we anticipate of the financial profiles of all of the rated Portuguese banks as a result of what we view as an increasingly difficult economic, financial, and operating environment in Portugal.”

S&P said it expects Portugal’s efforts to correct fiscal and external imbalances will push the economy back into a recession in 2011 and may limit growth for a longer period.

The ratings agency said this would likely hurt the asset quality of banks and they would also likely face increasing difficulties in raising funding on the markets.

On Thursday, S&P cut for Portugal’s long-term debt rating two notches to “BBB” from “A-” after Prime Minister Socrates resigned when his latest austerity package was rejected by parliament.

The country faces a difficult fiscal challenge in the coming months as it must roll over some nine billion euros in debt while investors are demanding unsustainable high interest rates to lend Lisbon money.

On Monday the yield, or return on investment, on Portugal’s 10-year bonds rose sharply to 7.818 percent, coming off a record 7.94 percent but still well up from 7.677 percent on Friday.

Most economists consider yields of higher than seven percent to be unsustainable in the long term, especially for an economy which is growing slowly or is stagnant, as is the case with Portugal.