A DANGEROUS new phase in the eurozone crisis opened up this week after the ratings agency Moody's downgraded Portugal's debt to junk status and said the country would need a second bailout.
As the currency area's big banks met in Paris to refine their plans for a second bailout of Greece, Moody's issued a devastating analysis of Portugal's finances as it cut the country's credit rating by four notches, pushing it into junk territory.
The agency said it had rising concerns that Portugal could not achieve its budget deficit reduction plans and was facing ''formidable challenges in cutting spending, increasing tax compliance, achieving economic growth and supporting its banking system''
There was an ''increasing probability'' that Portugal would be unable to borrow at sustainable rates in the market, forcing a bailout on top of the €80 billion ($108 billion) it had accepted from the International Monetary Fund and the European Union in April.
The prospect of the continuing problems in Greece spreading to another of the eurozone's weak economies is a scenario politicians and finance chiefs in Europe have been determined to avoid.
The developments came after the German Chancellor, Angela Merkel, stepped up the pressure on the European Central Bank to overlook its ban on accepting defaulted bonds as collateral for loans, and sought to remove a significant roadblock to the latest Greek rescue package.
A day after Standard & Poor's (S&P) delivered a potentially lethal blow to a key Greek debt-swap scheme, by ruling that it would amount to a ''selective default'' on the bonds involved, Ms Merkel urged the ECB and other authorities to ignore the ratings agency's advice.
''I think it's important that we in the Troika - the IMF, the ECB and the European Commission - don't allow ourselves to relinquish our freedom to judge,'' she said. ''That's why I trust in the evaluations of these three institutions when it comes to specific procedures'' rather than those of rating agencies.
Germany's constitutional court has begun hearing a case that will decide whether her government was right to agree to last year's bailout of Greece and the accompanying rescue package for other EU countries.
The plans put forward by German and French banks last week would leave bondholders nursing losses, prompting S&P to rule that the losses would amount to a default. This was a blow to the proposals because the central bank has said it will not accept defaulted bonds as collateral.
Ms Merkel's comments add to mounting pressure on the ECB to make an exception for Greece. The ECB is understood to be determined to stand its ground but economists believe it is increasingly likely that the president, Jean-Claude Trichet, will have to find a way around the ban on defaulted bonds.
It is understood that the ECB is considering requiring all three of the major ratings agencies to rule that the debt-swap proposals amounted to a default before refusing to take the bonds as collateral.
Although S&P is the only agency to have announced its view on Greece, the other two - Fitch and Moody's - are expected to reach the same conclusion.
As the currency area's big banks met in Paris to refine their plans for a second bailout of Greece, Moody's issued a devastating analysis of Portugal's finances as it cut the country's credit rating by four notches, pushing it into junk territory.
The agency said it had rising concerns that Portugal could not achieve its budget deficit reduction plans and was facing ''formidable challenges in cutting spending, increasing tax compliance, achieving economic growth and supporting its banking system''
There was an ''increasing probability'' that Portugal would be unable to borrow at sustainable rates in the market, forcing a bailout on top of the €80 billion ($108 billion) it had accepted from the International Monetary Fund and the European Union in April.
The prospect of the continuing problems in Greece spreading to another of the eurozone's weak economies is a scenario politicians and finance chiefs in Europe have been determined to avoid.
The developments came after the German Chancellor, Angela Merkel, stepped up the pressure on the European Central Bank to overlook its ban on accepting defaulted bonds as collateral for loans, and sought to remove a significant roadblock to the latest Greek rescue package.
''I think it's important that we in the Troika - the IMF, the ECB and the European Commission - don't allow ourselves to relinquish our freedom to judge,'' she said. ''That's why I trust in the evaluations of these three institutions when it comes to specific procedures'' rather than those of rating agencies.
Germany's constitutional court has begun hearing a case that will decide whether her government was right to agree to last year's bailout of Greece and the accompanying rescue package for other EU countries.
The plans put forward by German and French banks last week would leave bondholders nursing losses, prompting S&P to rule that the losses would amount to a default. This was a blow to the proposals because the central bank has said it will not accept defaulted bonds as collateral.
Ms Merkel's comments add to mounting pressure on the ECB to make an exception for Greece. The ECB is understood to be determined to stand its ground but economists believe it is increasingly likely that the president, Jean-Claude Trichet, will have to find a way around the ban on defaulted bonds.
It is understood that the ECB is considering requiring all three of the major ratings agencies to rule that the debt-swap proposals amounted to a default before refusing to take the bonds as collateral.
Although S&P is the only agency to have announced its view on Greece, the other two - Fitch and Moody's - are expected to reach the same conclusion.
