WRAPUP 2-Portugal faces rating cut, Spanish debt costs rise

* Moody’s says may cut Portuguese debt rating

* Spanish yields rise moderately at T-bill auction

* China urges EU action to match words

* Stark says ECB not in business of financing governments

* Subordinated creditors take big hit on Anglo-Irish Bank

(Adds EU’s Rehn, Irish bank restructuring)

By Andrei Khalip and Nigel Davies

LISBON/MADRID, Dec 21 (BestGrowthStock) – Portugal was put on notice
that its credit rating could be cut and fellow euro zone debtor
Spain had to pay more to issue new debt on Tuesday, suggesting
the currency bloc’s crisis will rage unabated in 2011.

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

Ratings agency Moody’s said it may cut Portugal’s 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. [ID:nLDE6BK0HV]

“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 (EUR=: ) 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. [ID:nLDE6BK098]

The yield on Spain’s three month treasury-bill issue rose to
1.804 percent from 1.743 percent on Nov. 23, while six-month
paper cost 2.597 percent, up from 2.111 percent.

“All in all it’s a reasonable result in current conditions,
if far from impressive. It’s going to be testing times for
Spain, Portugal and even Italy heading into 2011,” said Orlando
Green, analyst at Credit Agricole.

A pre-Christmas market lull has taken some of the heat off
peripheral euro zone debt but the crisis will surely flare up
again in 2011 until or unless policymakers act decisively.

Already this month, Moody’s has put Spain and Greece on
review for possible downgrades and cut Ireland’s rating by a
savage five notches, while Standard & Poor’s said it may cut
Belgium’s debt rating next year.
Analysts said markets were pricing in even more doom for the
euro zone’s weaker members than the ratings agencies.

“Really the rating agencies are playing catch up with events
and arguably they’ve got a long way to go to get back up to
speed — they’ve been very much a lagging indicator throughout
the crisis,” said Chris Scicluna, deputy head of economic
research at Daiwa Capital Markets.

European Union leaders failed, at a summit last week, to
agree any specific new measures to stop contagion spreading from
Greece and Ireland, which have received EU/IMF bailouts, to
other high-deficit countries such as Portugal and Spain.

But they did agree to create a permanent financial safety
net from 2013 to handle future crises, which may require bond
investors to share some of the pain. [ID:nLDE6BF2A3]

Olli Rehn, the EU’s economic and monetary affairs
commissioner, told Reuters Insider the debt crisis was akin to a
“forest fire” which the EU was determined to contain.

“We will do whatever it takes to safeguard the financial
stability in Europe,” said Rehn.

The prospect that bond investors may have to take a hit on
distressed euro zone debt was brought sharply back into focus
after a group of subordinated creditors in stricken Anglo Irish
Bank [ANGIB.UL] agreed to take an 80 percent writedown on the
value of their holding, successfully concluding the nationalised
lender’s debt restructuring plan. [ID:nLDE6BK09V]
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphics: Euro zone debt struggle http://r.reuters.com/hyb65p BREAKINGVIEWS-Moody's warning is too soft [ID:nLDE6BK0PY] For interview with EU's Rehn http://link.reuters.com/reh23r More on euro zone debt [nLDE6T0MG] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>


China, which has invested an undisclosed portion of its
$2.65 trillion reserves in the euro, said it backed steps taken
by European authorities so far but made clear it would like to
see the measures having more effect. [ID:nTOE6BK01Q]

“We are very concerned about whether the European debt
crisis can be controlled,” Chinese Commerce Minister Chen Deming
said at a trade dialogue between China and the European Union.

“We want to see if the EU is able to control sovereign debt
risks and whether consensus can be translated into real action
to enable Europe to emerge from the financial crisis soon and in
a good shape.”

The European Central Bank has been buying Portuguese and
Irish government bonds to shore them up but not in the size
analysts say is needed to give the markets pause for thought.

Executive Board member Juergen Stark was quoted on Tuesday
as saying the ECB’s emergency asset purchase programme would
remain relatively modest, and based on the principle that all
euro zone states are responsible for their own finances.

“By no means will we reach the dimensions of other central
banks (with bond buys),” Executive Board member Stark told the
German daily Boersen-Zeitung. “We will also not change the
current character of the programme. [ID:nLDE6BK0J4]

A bailout of Portugal is widely expected but a similar
rescue for Spain would stretch EU resources to the limit.

Moody’s said if Lisbon sought international help, it would
ease short-term uncertainties, but would raise concerns about
medium-term access to private market funding.
(Additional reporting by Langi Chiang and Kevin Yao in Beijing
and Gergely Szakacs in Budapest, writing by Mike Peacock;
editing by Susan Fenton)

WRAPUP 2-Portugal faces rating cut, Spanish debt costs rise