Christine Lagarde began her first day as the head of the International Monetary Fund (IMF) yesterday facing a new eurozone crisis after the Moody's credit-rating agency consigned Portugal's debt status to junk.
The ratings agency said that it was concerned the country would need another bailout before it could return to the capital markets to borrow money again.
Portugal – which secured a €78bn (£71bn) loan from the IMF and European Union in May – said that Moody's move did not take into account political support for austerity measures. The country has pledged to cut its deficit to 3 per cent of GDP by 2013, from 9.1 per cent in 2010.
Moody's, however, questioned Portugal's ability to reduce the deficit that far as it cut its rating on Portugal's government bonds by four levels to Ba2 last night. The agency also pointed to parallels with Greece as it gave warning that there would be pressure on existing investors to take part in a debt restructuring if another bailout was required.
Analysts said that Moody's move re-ignited fears of contagion in the eurozone countries such as Spain and Ireland. "This renews the question of whether not just Greece but the other peripherals are likely to need more bailouts," Brian Dolan, at Forex.com in New Jersey, said. "These issues were not extinguished last week. There was a nice dose of water poured on them, but they are still smouldering, and this is like adding gasoline to those smouldering ashes."
The euro fell by almost 1 per cent to $1.4401, ending a six-day advance against the dollar which started after the Greek government approved tough austerity measures last week. Dominique Strauss-Kahn, Ms Lagarde's predecessor as head of the IMF, was on his way to Europe to attend talks thrashing out Portugal's bailout in May when he was stopped at an airport in New York and charged with the attempted rape of a hotel maid, which he has denied. Two months on, Portugal appears to have returned to the top of the agenda for Ms Lagarde when she meets the world's press this morning for the first time as head of the IMF.
Lagarde takes ethical pledge as IMF boss
Christine Lagarde, the former French finance minister, will receive a higher salary as head of the IMF than her predecessor, Dominique Strauss-Kahn, but will also be bound by new ethical strictures.
Ms Lagarde will be paid a net $467,940 (£291,000), plus an after-tax allowance of $83,760. The IMF said the increase reflected a rise in the cost of living. In new wording, her contract also says: "You are expected to observe the highest standards of ethical conduct, consistent with the values of integrity, impartiality and discretion. You shall strive to avoid even the appearance of impropriety in your conduct." Unlike Mr Strauss-Kahn, Ms Lagarde will have to take the ethics training required for IMF staff.
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