Rating cut triggers fresh spike in Portugal's borrowing costs

Another cut in Portugal's credit rating has sent the yields on the country's bonds to their highest level since the euro's launch last night.

Moody's lowered Lisbon's rating by one notch to BAA1, driving up the country's borrowing costs a day ahead of a planned short-term debt auction by the country's public debt agency IGCP this morning.

The markets have grown increasingly nervous about Portugal's debt mountain since the minority Socialist government resigned after parliament rejected its austerity plans. An election is scheduled for June, but yesterday a local press report said that the heads of the country's biggest banks had met the governor of the central bank and told him that Lisbon should seek short-term financing to ease market nerves ahead of the poll.

Moody's said it thought that the new government was likely to "approach" the European Financial Stability Facility (EFSF), the EU bailout fund forged in the wake of the Greek bailout, "as a matter of urgency". The agency went on to say that it expected "other members of the eurozone" to pitch in with support and that Portugal "needs financing on an expedited basis" before it can access the EFSF.

Standard & Poor's and Fitch, the other big ratings agencies, have already revised their view of the country's creditworthiness since the Socialist Government resigned last month.

The turmoil drove yields on Portugal's 10-year government bonds to a new record above 9.033 per cent in mid-afternoon trading, while credit default swaps, which reflect the cost of insuring against the possibility of a country defaulting on its debts, implied a 41 per cent probability of a Portuguese default within five years. That compares to 33 per cent chance in February, according to market data from the credit market specialist CMA.

Despite market movements, recent comments from the caretaker Prime Minister Jose Socrates suggest that Lisbon may attempt to hold out until a new administration is election. Speaking to RTP Television on the night before the Moody's downgrade, he said: "I am committed to the idea of defending Portugal from external aid."