Barroso hits out as Portugal debt rated as ‘junk’

Jose Manuel Barroso said Portugal had just begun a recovery programme approved by the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) and Moody’s decision on Tuesday to drop Portugal’s rating to “junk” status was, he indicated, unhelpful and unnecessary, and only added to the speculative uncertainty.

The move, reducing Portugal’s debt four notches, sent shockwaves across Europe after Moody’s said the country would probably follow Greece in needing a second rescue package.

Neighbouring Spain immediately suffered a knock-on effect, with Madrid’s main stock index down and bond yields up. Spain has, until now, managed to dodge major fallout from the continent’s fiscal woes.

Jitters were felt in Italy, where stocks were down on concerns that spending cuts might not be enough to bring down high debt.

Fears the crisis might grow to engulf larger economies is a looming threat for markets. Rescuing Spain and Italy would be many times more expensive than all the bailouts the EU has paid for so far.

The downgrade – viewed by some analysts and officials as unexpectedly harsh – triggered new outrage in Portugal, where austerity measures over the past year have included tax hikes, pay freezes and welfare cuts.

Mr Barroso told a Press conference in Strasbourg the EU’s decisions on financial matters were based on “objective assessments”.

“I deeply regret the decision of one rating agency to downgrade the Portuguese sovereign debt, both in terms of its timing and its magnitude,” he added. “Portugal has just started to implement a medium-term adjustment programme negotiated and agreed with the Commission, the ECB and the IMF – a programme backed by all euro area member states.”

He said Portugal’s fulfilment of conditions attached to the programme would be assessed quarterly by the Commission, ECB and the IMF.