WRAPUP 3-Standard & Poor’s downgrades Greece, Portugal

* S&P warns debts could be subordinate to EU loans

* Bond yields shoot higher

* Bank of Portugal says more austerity moves needed
(Recasts, adds Prime Minister Socrates saying no bailout
needed)

By Andrei Khalip and Ingrid Melander

LISBON/ATHENS, March 29 (Reuters) – Debt-stricken Greece
and Portugal suffered new blows on Tuesday after Standard &
Poor’s downgraded their credit ratings on possible risks to
bondholders, sending their borrowing costs sharply higher.

The downgrade by S&P, which cited risks that the countries’
debts to a new European bailout fund would be repaid before
bond investors, left Portugal’s rating one notch above junk and
Greece’s creditworthiness below that of Egypt.

The downgrade hit the bonds of both countries — two of the
weakest countries in the euro zone. The yield on Portugal’s 10-
and two-year bonds jumped to euro lifetime highs, and the yield
on Greece’s two-year bonds rose 10 basis points to 15.46
percent.

S&P analyst Frank Gill said the downgrades came after the
agreement by European leaders last week to replace the European
Union’s bailout fund with the European Stability Mechanism in
2013.

“Our view is that this really is a game changer,” Gill told
journalists.

“We do think it is clearly negative for holders of
commercial debt, that is our view, that it will weigh on
countries’ capacity to serve their commercial debt,” he said.

The downgrade of Portugal added to Lisbon’s woes, just as
the Bank of Portugal warned the country may need substantial
new austerity measures to ensure it can meet budget goals.

Lisbon is grappling with how to regain investor confidence
following the minority government’s resignation last week after
the opposition rejected its austerity plan in parliament,
prompting many economists to predict the country will need a
bailout soon like Greece and Ireland.

“Given Portugal’s weakened capital market access and its
likely considerable external financing needs in the next few
years, it is our view that Portugal will likely access the EFSF
and thereafter the ESM,” Standard & Poor’s said.

European leaders agreed a new package of anti-crisis
measures at a two-day summit last week but delayed an increase
in the size of the euro zone’s rescue fund, known as the
European Financial Stability Facility. However, they sealed a
deal on funding the ESM, a new, permanent safety net that will
become operational in mid-2013.

Portugues Prime Minister Jose Socrates, who still retains
full powers and is likely to remain as a caretaker premier
until a new government is formed after an election, reiterated
he had no intention of requesting an international bailout.

Socrates, who made no comments on the downgrade talking to
reporters, attacked the opposition for rejecting his austerity
plan and exacerbating the country’s debt woes, urging it to
come up with alternative measures to meet budget deficit
goals.

“It is not enough for the parties to say they are committed
to budget consolidation goals. It has been said many times. It
is crucial that they say what measures they propose to get to
this deficit. This would help the country,” he said.

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For a package of graphics on the crisis:

http://r.reuters.com/hyb65p

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Standard & Poor’s downgraded Portugal by one notch to
BBB-minus, adding to a two-notch cut last Thursday. Still,
S&P’s Gill said Portugal was still highly creditworthy and the
market was exaggerating default concerns.

“The rating cut has been mostly priced in, but it’s not
just that,” said Deutsche Bank economist Gilles Moec. “I think
it’s in Portugal’s best interests to take a bailout soon rather
than continue raising debt at much too high interest rates.”

S&P downgraded Greece by one notch to BB-minus, deeper into
junk territory, and below Turkey and Egypt, which are at BB.

“It is not a surprise as Greece was on negative watch,”
said analyst Ben May at Capital Economics. “Obviously, it is a
reminder that Greece has lots of problems. We continue to think
that a debt restructuring is likely.”

Gill of S&P said the new bailout mechanism was also likely
to impact the rating of Ireland, which has a grade of A-minus,
three levels above Portugal.

The Athens bourse’s general index fell 0.4 percent, with
Greek banks among the worst performers, losing 3.66 percent,
after the downgrade. Portuguese stocks fell slightly, with
banks falling more than 2 percent.

The Greek Finance Ministry said S&P’s downgrade was based
on an erroneous evaluation of last week’s EU summit decisions.

“It does not reflect the effort and success of the Greek
economic policy programme or Greece’s economic prospects,” the
ministry said in a statement.

Earlier on Tuesday, in its spring economic report, the Bank
of Portugal said there were risks of the country missing budget
goals this year, adding that in 2012 the pressure for more
measures could be greater, depressing the economy.

“In 2012 the additional, permanent measures necessary to
reach the goal promised by the authorities reach a very
substantial size,” the bank said.

It forecast economic contraction of 1.4 percent this year
and growth of 0.3 percent in 2012, but said those projections
did not include likely additional austerity measures and
economic deleveraging. The economy grew an estimated 1.4
percent in 2010.

Adding to Lisbon’s and Athens’ woes, there were new signs
pointing to an increase by the European Central Bank in its
main interest rate next month from a record low as the rest of
Europe’s recovery gathers steam and peripheral economies
suffer.

“It is highly probable that there will be a change in
interest rates in April, but it is not certain,” said ECB
Governing Council member Jozef Makuch.
(Additional reporting by Harry Papachristou and Renee Maltezou
in Athens, Martin Santa in Bratislava; Writing by Axel Bugge;
editing by Stephen Nisbet, Ron Askew and Leslie Adler)

WRAPUP 3-Standard & Poor’s downgrades Greece, Portugal