European markets unruffled by Portugal aid request

(AP) LONDON — Portugal's request for a bailout could mark the moment that Europe finally contained its debt crisis.

Unlike previous bailout requests, Portugal's has not been greeted by a chorus of concern in financial markets over which country will be next. The European Central Bank even raised interest rates on Thursday as it turned its sights from the dangers of the debt crisis to the problem of inflation.

That suggests that after a year of summits, political spats and last-minute emergency measures, markets believe the bailout domino effect may be over — though analysts warn the crisis has seen false dawns before.

In part, the markets had already accounted for Portugal's troubles as its borrowing costs became more and more unsustainable, so the only surprise in the bailout request was its timing.

The announcement by Portugal's caretaker Prime Minister Jose Socrates on Wednesday evening capped a torrid few months for the country, which had been using every tool at its disposal to prevent an embarrassing bailout.

The euro remained strong, near 15-month highs against the dollar at $1.43, largely thanks to expectations that the European Central Bank will follow up Thursday's interest rate increase with more hikes this year.

The response in bond and stock markets has been equally relaxed, with Spanish borrowing rates in the bond markets largely unchanged and its stock market one of the strongest performers in Europe.

Since the government debt crisis exploded over a year ago, Spain was bracketed in with Greece, Ireland and Portugal as an imperiled eurozone economy.

Greece's debt rating is cut to junk; financial woes spread to Portugal

Standard & Poor's cut the credit ratings of Greece and Portugal, spooking investors and sparking a market sell-off worldwide. The downgrades also dashed the hopes of European officials who thought they could contain the credit crisis. Investors were concerned about Greece's position before the downgrades because there was indication that the EU and International Monetary Fund's aid package for Greece might be delayed by Germany.

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Portugal’s Debt Rating Lowered by Fitch

(Bloomberg) -- Portugal’s credit grade was cut by Fitch Ratings, underscoring growing concern that Europe’s weakest economies will struggle to meet their debt commitments as finances deteriorate.

The rating was lowered one step to AA- with a “negative” outlook, Fitch said in a statement today. The euro extended its decline, weakening 1.1 percent to $1.3355 as of 10:32 a.m. in London. Portuguese bonds fell, with the yield on the 10-year note rising 5 basis points to 4.33 percent. Portugal’s PSI-20 Index of stocks dropped 2 percent.

Euro-region governments in the so-called peripheral nations, including Greece, Ireland, Italy and Spain, are seeking to narrow budget deficits that have exceeded the European Union’s 3 percent limit by as much as four times. Portugal’s gross domestic product per capita and trend growth are “significantly below” what is typical for a AA country, reducing its ability to tolerate the global economic downturn, Fitch said.

“A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,” Douglas Renwick, associate director at Fitch, wrote in the report from London. “Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than 15 European Union peers, which will put pressure on its public finances over the medium term.”

Deficit Plans

Portugal is planning to cut its budget deficit to 8.3 percent of gross domestic product this year from last year’s 9.3 percent. The government predicted economic growth in 2010 of 0.7 percent after a decline last year depressed tax revenue.

“Portugal’s downgrade underlines the problems in the European Union,” said Paul Robinson, a currency strategist at Barclays Capital in London. “People are worried about the fiscal situation in the southern European economies and the prospects for those economies.”

The cost of protecting against losses on Portugal sovereign debt rose to the highest in almost a month, according to CMA DataVision prices for credit-default swaps. Five-year contracts insuring $10 million of bonds increased $6,000 a year to $140,000. Swaps rise as perceptions of credit quality worsen.

Today’s downgrade for Portugal is the first by Fitch since 1998, and puts it one level below the Aa2 rating assigned to it by Moody’s Investors Service. The last time Portugal’s credit was lowered was on Jan. 21, 2009, when Standard & Poor’s cut it to A+, two steps lower than Moody’s and one step below the level Fitch gave it today.