Wednesday, January 14, 2009

Portugal joins eurozone list on ratings warning

--Portugal joined Spain, Ireland, and Greet to be downgraded by S&P Portugal joins eurozone list on ratings warning By Tony Barber in Brussels and David Oakley in London Published: January 14 2009 02:00 Last updated: January 14 2009 02:00 Portugal yesterday became the latest eurozone country to be warned by Standard & Poor's, the credit ratings agency, that it faced a possible downgrade to its ratings status because of its public finances - the fourth eurozone member to face such a threat in as many days. Spain was warned on Monday by S&P about its high levels of public and private debt, while Greece and Ireland were told on Friday that their deteriorating public finances could lead to downgrades. This has led to a sharp widening in the gap between German bond yields and those of other eurozone countries. But they are not the only European Union countries to have been warned that their credit ratings may be downgraded because of deteriorating public finances. On December 22 Fitch Ratings cut Lithuania's long-term foreign currency issuer rating from A- to triple B+, explaining that the risks to fiscal stability were likely to grow as the country fell ever deeper into recession. Credit ratings downgrades imply higher borrowing costs and can have a much greater impact if governments then allow their budget deficits to rise in an effort to spend their way out of recession. As the threats to the European economy rose in the last three months of 2008, EU leaders agreed first on a temporary relaxation of the bloc's rules on fiscal discipline - which are codified in its Stability and Growth Pact - and then on a €200bn (£180bn) stimulus plan. However, some EU finance ministers have been uncomfortable with this approach. Germany, which has made strenuous efforts to put its fiscal house in order over the past three years, is far from alone in being concerned that excessive fiscal easing may inflict long-term damage on Europe's monetary union - a price the Germans are adamant they will not pay. The anxiety of the Germans and other guardians of fiscal rectitude, which include Belgium and the Netherlands, may be all the more acute after the downgrade warnings delivered over the past week by Standard & Poor's. Countries outside the eurozone, such as the Czech Republic, Lithuania and Poland, are also worried. Partly, this is because they have aspirations to join the single currency area by 2012-13, a goal that would be cast out of reach if they were to have too high a budget deficit. But it is also because of disturbing episodes such as last week's failed attempt by the German government to sell €6bn of 10-year sovereign bonds to investors.

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