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Portugal and Greece downgraded on debt worries

Protesters in Portugal
Image caption Portugal's austerity measures sparked widespread protests, but may not go far enough

Ratings agency Standard & Poor's has downgraded struggling Greece and Portugal on further debt worries.

S&P says investors in their bonds could lose out under the terms of a new eurozone bail-out package.

The move pushed up the countries' borrowing costs as lenders demanded a higher rate of return for buying government bonds.

The downgrades left Portugal one notch above junk rating and Greece's creditworthiness below that of Egypt.

S&P cut Portugal by one notch to BBB-, having slashed its rating last week after Lisbon's government fell.

Greece was cut by two notches to 'BB-', the latest in a series of downgrades.

S&P, one of the top three ratings agencies, said the downgrades were in response to concerns that a new eurozone debt rescue system agreed at a European Union summit last week could penalise investors.

"Our view is that this really is a game changer," S&P analyst Frank Gill said, referring to the European Stability Mechanism (ESM) agreement.

"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 ESM means that investors could see their investments restructured, either in terms of the amount they get repaid or the length of time they have to wait for repayment.

Portugal has not yet called on money from the European bail-out fund, but many analysts believe it is just a matter of time as the country's economic situation worsens.

The Bank of Portugal warned on Tuesday that the country might need substantial new austerity measures to ensure it can meet budget reduction targets.

Higher costs

For Greece, whose near default in May threatened to sink the whole eurozone project, S&P said the government was struggling badly to meet the targets set under its 110bn euro (£97bn;$150bn) EU-IMF bail-out deal.

The S&P downgrades had an immediate impact in the money markets.

The yield, or return rate, for investors in Greek benchmark 10-year bonds rose to 12.568% from 12.499%.

Portuguese rates rose to 7.881% from 7.818%, having hit a record high of 7.97% shortly after S&P's announcement.

Yields of 7% or above are considered unsustainable in the long run, meaning both countries could face problems raising money from lenders.

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