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Portugal, Spain add to EU woes

Portugal was put on notice on Tuesday that its credit rating could be cut and fellow euro zone debtor Spain had to pay more to issue new debt, suggesting the currency bloc’s crisis will rage unabated in 2011.

business Updated: Dec 21, 2010 20:59 IST

Portugal was put on notice on Tuesday that its credit rating could be cut and fellow euro zone debtor Spain had to pay more to issue new debt, suggesting the currency bloc’s crisis will rage unabated in 2011.

China, the world’s economic powerhouse, urged European policymakers to demonstrate as a matter of urgency that they can contain the euro zone’s debt problems and pull the bloc around.

Ratings agency Moody’s said it may cut Portugal’s credit rating by one or two notches within three months, citing weak growth prospects as the government seeks to cut its debt, and climbing borrowing costs, although it said its solvency was not in question.

“The likely deterioration in debt affordability over the medium term and ongoing concerns about the economy’s ability to withstand fiscal consolidation ... mean its outlook may no longer be consistent with an A1 rating,” said Anthony Thomas, Moody’s lead analyst for Portugal. The cost of insuring Portuguese sovereign debt against default rose in response and the euro slipped.

Spain cleared its final debt sale of the year, but predictably had to pay a higher price and analysts warned of tough times ahead in 2011. The yield on Spain’s three month treasury-bill issue rose to 1.804% from 1.743%.