Moody's mulls Portugal downgrade

A major credit rating agency warned Wednesday it may downgrade its rating for Portugal.

Moody's Investor Services said itwillhold Portugal's Aa2 bond rating on review for possible downgrade over the next three monthsas a result of the recent deterioration in the country's public finances as well as its long-term growth prospects.

The country's ratingcould fall by one, or at most two notches, Moody's said. But coming on the heels of a similar downgrade by rival Standard and Poor's last week and ongoing debt woes in nearby Greece, the announcement rattled investors still jittery over widening debt worries across Europe.

Portugal managed toraise more than $650 million US in bonds on Wednesday, its first attempt to do so since the S&P downgrade last week. Fears are that Portugal will require a Greek-style bailout from the IMF, but that didn't manifest itself in higher borrowing costs for Portugal's offering Wednesday.

Portugal paid an average of 2.995 per cent on the six-month bonds, and officials said it was six-times oversubscribed meaning there were six times as many willing buyers than there were treasuries for sale. But in the minutes following the Moody's news, the spread between Portugal 10-year bonds and benchmark German bonds rose 40 basis points to 5.8 per cent.

"Having to pay a lot higher rate is a worry," said Ben May, eurozone economist at Capital Economics in London, though he added that for the moment paying that rate is not beyond Portugal's reach.

'We need to go further to look at the impact of the ratings' Michel Barnier

Despitea budget deficit that hit 9.4 per cent of GDP last year (well short of Greece's 15.4per cent)Moody's stressed the country's debt service costs remain "very affordable in the near to medium term."

Portugal has another $6 billion US in bonds by May 20, and it has already managed to raise more than $5 billion US in bonds so far this year.

The ratings warning from Moody's comes a day after Europe's financial services commissioner Michel Barnier told EU lawmakersthey should considerstarting theirown agency to handle sovereign debt.

"I think we need to go further to look at the impact of the ratings on the financial system or economic system as a whole," Barnier said.

"The power of these agencies is quite considerable not only for companies but also for states."

New agency?

On Thursday, European Commission president Jose Manuel Barroso echoed those remarks, telling Reuters that the agencies were too reliant on "market mood" than fundamentals in setting their ratings.

He also expressed concern that the industry is dominated by three players Moody's, S&P, and Fitch.

Under European Central Bank rules, if a country's credit rating descends to "junk" status, the ECBcould no longer accepttheir bonds as collateral in lending, making it harder to roll over debt into new loans. Fears of a spreading debt crisis would grow.

"Who is Standard & Poor's anyway?" EU spokesperson Amadeu Altafaj Tardioangrily said last week, adding thatthe agency should better assess "realities on the ground" as opposed to irrational sentiment.