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Portugal credit rating downgrade squeezes gov’t

LISBON, Portugal (AP) — Portugal’s borrowing costs in the markets pushed higher Wednesday after Moody’s downgraded the debt-laden country’s credit rating, stoking the pressure on a beleaguered minority government battling to avoid a bailout.

The rating cut, which came on the eve of a 1 billion sale of 12-month Portuguese Treasury bills, was also a blow to Europe’s attempts to get a grip on the continent’s debt crisis.

Last weekend’s surprisingly broad EU plan to deal with the debt crisis was greeted positively in the markets in the early part of the week.

A bailout for Portugal could well trigger a fresh bout of eurozone volatility, and may prompt investors to look at which country may be next — Spain, Belgium and Italy are all countries weighed down by debt.

The yield on Portugal’s ten-year bond rose 0.04 percentage point to 7.45 percent after Moody’s Investors Services cut the country’s rating by two notches to A3 Tuesday. The equivalent yields for Greece and Spain, two other euro countries struggling with high borrowing levels, were down modestly.

Portuguese Prime Minister Jose Socrates said late Tuesday he would quit if Parliament doesn’t consent to his government’s latest batch of contested austerity measures. No date has yet been set for parliamentary vote, though Socrates has said he doesn’t want to go to a March 24-25 EU summit without the plan approved.

Opposition parties have balked at the new steps, devised to restore market confidence in Portugal and hopefully lower the country’s unsustainable borrowing costs. The government’s opponents say the need for more measures shows the government has failed to get Portugal’s economy back on track.

Portugal’s budget deficit hit a record 9.3 percent of gross domestic product in 2009. That was the fourth-highest level in the eurozone and has alarmed markets.

The government says it reduced the deficit to below 7.3 percent last year and is aiming for 4.6 percent this year.

European leaders backed the government’s strategy at a summit last week which offered Portugal a way out of its woes without resorting to a bailout like Greece and Ireland.

The plan, to be ratified at the summit of leaders next week, includes increasing the size of the bloc’s bailout reserve and allowing it to purchase government debt which investors are reluctant to take on.

The government has acknowledged that the interest rates it is paying on loans — for weeks at more than 7 percent on Portuguese 10-year bonds — are unsustainable in the long term.

Moody’s said it expected Portugal to struggle to generate economic growth and meet its ambitious spending reduction plans.

Some analysts fear the austerity measures could backfire as they bite further into Portugal’s weak economic recovery after a contraction in 2009. The Bank of Portugal expects a double-dip recession this year, while the jobless rate has risen to a record 11.2 percent.

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