Lisbon Stock Market collapsed on Tuesday amid investor fears that Portugal could default on its sovereign debt.
The panic devaluation of stocks, shares and government bonds followed nervousness on the international money markets following ratings agency Standard & Poors’ decision to downgrade both Portugal and Greece.
It means that the cost of servicing sovereign debt and borrowing on the international money markets will increase in terms of interest payments.
It also means that Portugal will find it more difficult to get credit because the move tells investors and international agencies that Portugal is a high risk country.
Six per cent was wiped off the value of stocks and bonds on Wednesday following ‘Black Tuesday’ which saw a tumble of four per cent.
The move has been mirrored by a drop in the FTSE by 2.06 per cent, the Dow Jones dropped 1.18 per cent and the Euro has also fallen to €1.33 against the dollar.
The S&P agency downgraded Portugal’s long-term ratings to ‘A-‘ from ‘A+’ and long-term ratings of Greece to ´BB+/B’ from BBB+/A2, which drops Greek bonds to ‘junk status.’
high debt
Portuguese Finance Minister Fernando Teixeira dos Santos said that the move was irresponsible and was causing alarmist speculation, and reiterated that Portugal was nowhere near the same situation as Greece.
But the Portuguese government deficit rose to 9.4 per cent of GDP in 2009 from 2.7 per cent in 2008.
S&P credit analysts say that the “two-notch downgrade reflects our view of the amplified fiscal risk Portugal faces. We expect the Portuguese government could struggle to stabilize its relatively high debt ratio over the outlook horizon until 2013.”
Chris Graeme
