Germany pushes Portugal nearer to the brink?

BBC business editor Robert Peston on Mr Hester's expectations

The decision of Standard & Poor's to downgrade Portugal's sovereign debt to just a fraction above a junk rating will inevitably make it harder for Portugal to borrow in the coming weeks - when it will need to refinance more than €8bn of bonds that come up for repayment.

So in that sense, S&P's downgrade pushes Portugal nearer to crisis and the moment when it asks its eurozone partner countries for a bailout.

What is embarrassing for those partner countries is the main reason cited by S&P for the bailout - namely that eurozone leaders agreed last Friday that the new eurozone bailout fund to be launched in 2013, the European Stability Mechanism, will only lend on terms that will make it the senior creditor when it comes to repayment.

European Stability Mechanism loans will rank ahead of borrowings by eurozone sovereign states. So, by definition, the credit quality of any debt issued by a fragile eurozone country like Portugal - one deemed likely to tap the European Stability Mechanism - has deteriorated.

Which is why S&P felt it had no option but to downgrade Portuguese debt (and Greek debt too - and Ireland's debt will probably be downgraded later this week).

Or to put it another way, the understandable determination of Germany in particular to minimise losses when rescue funds are actually provided, and also to punish reckless sovereign borrowers, has had the effect of making it more likely that Portugal will have to tap the eurozone and the IMF for emergency funds (as Ireland and Greece have already done).

In other words, the reward of German prudence is that German taxpayers are now even more likely to have to bail out their Portuguese neighbours.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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