http://www.nytimes.com/2010/03/25/busin ... rkets.html
Euro Falls After Downgrade for Portugal
By DAVID JOLLY
The euro hit an 11-month low on Wednesday, and shares on Wall Street and in Europe traded within a narrow range after Portugal’s debt was downgraded by Fitch Ratings. The downgrade turned up pressure on government leaders to come up with a comprehensive solution to the euro area’s financial woes.
The euro was at $1.3345, from $1.3388 late Tuesday in New York. It was the lowest level for the 16-nation currency since May 2009, and marked a continuing slide from a November peak of $1.5145 that began with market fears that the so-called PIIGS — Portugal, Ireland, Italy, Greece and Spain — were building up fiscal imbalances that would make it hard for them to refinance their debt.
itch Ratings said Wednesday that it had cut its rating of Portugal’s long-term foreign- and local-currency debt to AA– from AA, and that the outlook on the long-term debt was “negative.”
The downgrade, Fitch said, reflected the fact that the Portuguese government’s 2009 budget deficit ultimately swelled to 9.3 percent of gross domestic product, well above the 6.5 percent the ratings agency expected.
“This has significantly increased the scale of the fiscal challenge to stabilize and reduce debt over the medium term,” Fitch’s statement said. Portugal will need to take “sizeable consolidation measures” beginning next year, Fitch said, and withdraw fiscal stimulus this year, if it is to meet the European Union’s deficit target of no more than 3 percent of gross domestic product by 2013.
Portugal announced an austerity package this month that included reducing government spending, raising taxes on high-earners and capping wage growth in the public sector, with the goal of meeting the European Union’s deficit target of no more than 3 percent of G.D.P. by 2013.
After the downgrade, Portugal’s finance ministry reaffirmed its “strong commitment to fiscal consolidation,” while noting that Fitch found some things to praise, including the “credibility” of its budget plans.
Portugal “will continue to improve the conditions for economic, financial and fiscal recovery,” the finance minister, Fernando Teixeira dos Santos, said in a statement.
The minority Socialist government on Thursday was to ask Parliament to pass a resolution of support for its plan, Reuters reported from Lisbon. An abstention by the Social Democrats, the largest opposition party, would allow the resolution to pass.
The Social Democrats abstained in the vote on the 2010 budget on March 12, allowing its passage.
In late morning trading in New York, the Dow Jones industrial average was 58.20 points, or 0.52 percent, lower, while the Standard & Poor’s 500-stock index fell 7.48 points or 0.64 percent. The technology heavy Nasdaq dropped 17.05 points or 0.7 percent.
Before Wall Street opened, the Commerce Department said that orders for durable goods rose 0.5 percent last month. While that was the third consecutive monthly increase, it was slightly lower than the 0.7 percent gain that economists had expected.
The increase was led by another jump in demand for commercial aircraft, an increase of 32.7 percent which followed a 134.9 percent rise in this volatile category in January.
The agency also reported that sales of new homes weakened to a record low in February, dimming prospects for a swift recovery for the housing market.
Over all, sales were down 2.2 percent, the agency said, to a seasonally adjusted annual rate of 308,000. Economists had forecast a 1.9 percent rise. Those numbers followed a similarly bleak report on Tuesday that showed sales of existing homes dropped in February, despite a generous government tax credit meant to lure buyers.
On Tuesday, Wall Street shares closed at an 18-month high as investors snapped up industrial and materials stocks. In addition, better-than-expected data on home sales helped renew confidence about the economy, even though investors remained concerned that a recovery for the housing market was stalling.
In Europe, shares began to regain some of their loses in afternoon trading. The FTSE-100 index in London was 2.66 points higher, while the DAX in Frankfurt was 4.53 points higher. The CAC-40 in Paris was 15.50 points, or 0.39 percent, lower. In Portugal, the Lisbon benchmark PSI 20 index fell 1.6 percent. The yield on the Portuguese 10-year bond ticked up four-hundredths of a percentage point to 4.3 percent. The German 10-year bund, deemed safer, yielded 3.1 percent.
The downgrade for Portugal came a day before European Union leaders were scheduled to meet in Brussels to try to decide on an aid package for Greece, which is being punished by bond markets as it struggles to close an even higher budget gap.
European leaders are scheduled to meet Thursday in Brussels to try to decide on an aid package for Greece, which is being punished by bond markets as it struggles to close an even higher budget gap.
Germany had indicated Tuesday that it might agree on an aid package for Greece financed in part by the countries of the euro zone — but only as a last resort. Berlin made clear that the Greek government would have to exhaust its ability to borrow, and that any rescue would have to involve the International Monetary Fund.
Fitch said Portugal would need to take “sizable consolidation measures” beginning next year, as well as withdraw fiscal stimulus this year if it is to meet its deficit-reduction target.
Portugal, a country of about 11 million people, had a gross domestic product last year of $232.2 billion, making it the world’s 50th largest economy. Its banking sector dodged the financial crisis better than some of its neighbors, but public finances have suffered.
Fitch said its negative outlook reflected its concern about the Portuguese economy and public finances over the medium term, “given the country’s existing structural weaknesses and high indebtedness across all sectors of the economy.
But Fitch said the likelihood of the government facing a liquidity crisis “is low.”
In her research note, Ms. McKeown wrote that, while its finances compared favorably with Greece’s, Portugal is another peripheral euro-zone economy with weak growth or even recession ahead, “as public borrowing is reduced and it goes through a long and painful period of competitive adjustment.”
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