Portugal downgrade cause euro and stocks to decline

Portugal’s sovereign debt was downgraded to “junk,” by credit agency Fitch Ratings, causing stocks and the euro to drop, The New York Times reported.

Fitch’s downgrade served as a reminder of the euro zone crisis, dropping its bond rating from BBB-minus to BB-plus. Moody’s Investors Service had already cut the bonds to junk status in July, although Standard & Poor’s has kept them just above that level, The Times reported. Fitch said “the recession makes the government’s deficit-reduction plan much more challenging and will negatively impact bank asset quality,” The Times reported.

The downgrade sent Portugal’s 10-year bonds further down, and yields surged more than 100 basis points to 13.85, which is the second highest level in the euro zone after Greece, Reuters reported. Portugal’s latest downgrade comes after weeks of the euro zone crisis expanding in Italy, Greece and Spain, causing political uproar.

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"The worsening regional outlook helped inform the downgrade (of Portugal)," Rabobank said in an analyst note, Reuters reported. "This, in turn, underlines the mounting risk of systemic downgrades."

Portugal wanted a 78 billion euro bailout from the European Union and International Monetary Fund earlier this year, Reuters reported. After adopting new austerity measures, the cut the budget deficit to 5.9 percent of the GDP this year from 10 percent in 2010. According to Reuters the deficit will be cut further to 4.5 percent.

Portugal wasn’t the only country in the euro zone sending the markets down today. When German Chancellor Angela Merkel dismissed calls from the European Central Bank to play a bigger role in resolving the debt crisis, stocks continued to plunge, the Associated Press reported. Merkel was able to get French President Nicolas Sarkozy to back changes to current EU treaties in order to further unify the euro zone, but did say there wouldn’t be any new provisions involving the ECB.

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"In the treaty changes we are dealing with the question of a fiscal union, a deeper political cooperation … there will be proposals on this, but they have nothing to do with the ECB," Merkel said, the AP reported.

Merkel also continued to oppose the use of eurobonds, pushed by the European Commission. Germany has continued to oppose eurobonds due to the fear that borrowing costs would be diluted if they came into issue and would be forced to pay higher rates to tap bond markets, the AP reported.

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