The euro slumped today, falling against the US dollar for the first time after six sessions of gains, as Moody’s downgraded Portugal’s rating to junk today.
Moody’s Investors Service cut the credit rating of Portugal to Ba2 from Baa1, two levels below investment grade, and assigned a negative outlook today. The agency explained its decision by two factors:
1. The growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a
2. Heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union (EU) and International Monetary Fund (IMF) due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.
Moody’s speculated that the European governments are concerned with increasing share of Greece’s debt carried by public investors as private creditors shun the nation’s debt and any future plan to finance Greece will include a preconditioned participation of private investors. The agency pointed out that, while Portugal’s debt rating is better than Greece’s, indicating lower risk of restructuring, the risk remains that any further lending to Portugal will also require private participation.
EUR/USD traded at 1.4422 today as of 21:37 GMT after it opened at 1.4537 and dropped as low as 1.4396. EUR/JPY fell from 117.46 to 116.93 and EUR/GBP slid from 0.9037 to 0.8978.
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