Standard and Poor’s has downgraded Greece and Portugal’s credit rating after further debt worries.
The ratings agency downgraded the debt-stricken countries on the risk their debts to a new European bailout fund would be repaid before bond holders.
Their downgrade left Portugal’s rating one notch above junk and Greece’s creditworthiness below that of Egypt.
This turn in fortune for the two countries, two of the weakest in the euro zone, has sent their borrowing costs sharply higher as lenders demanded a higher rate of return for buying government bonds.
Portugal’s rating was cut by one notch to BBB-, having slashed its rating last week after Lisbon’s government fell.
S&P said the downgrades came after a new euro zone debt rescue system was agreed to by European leaders at a summit last week.
The European Union’s bailout fund will be replaced with the European Stability Mechanism in 2013.
Frank Gill, S&P analyst, said: “Our view is that this really is a game changer.
“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 economic problems, just as the Bank of Portugal warned the country may need substantial new austerity measures to ensure it can meet budget reduction targets.
Lisbon’s investor confidence has fallen after the minority government’s resignation last week.
The opposition rejected its austerity plan in parliament, prompting many economists to predict that it will not be long before the country will need a bailout like Greece and Ireland.
Standard & Poor’s said: “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.”
S&P said Greece’s government was struggling badly to meet the targets set under its 110bn euro (£97bn;$150bn) EU-IMF bail-out deal.