6.7.2011

By Simon Miller

The Euro has continued to slide this morning after Moody's downgraded Portugal to 'junk' status.

Amid fears of the health of the Eurozone, the Euro started this morning down against the dollar and sterling as investors reflected on the downgrade.

The rating agency downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. In addition, Moody's also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2. The rating action concludes the review of Portugal's ratings initiated on 5 April 2011.

Moody's said there was a growing risk that Portugal will need another round of financing before it can return to the private market and that there was an increasing possibility that private sector creditor participation would be required as a pre-condition.

In the downgrade note, Moody's added: "The EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well.

"This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms."

In additon, there were fears that Portugal will miss reaching its 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.

As of 09.30GMT, the Euro sat at €1.44 against the dollar and €0.90 against the pound.