Investors punish Spain, Portugal banks

Another blow received LISBON - Portugal's banks Friday at Moody's investors service that was second ratings company in one week, to threaten a downgrade of your continued reliance on financing from the European Central Bank.

Many analysts say the problem is likely to remain shores to the Portuguese Government to his finances. Shares in Spanish banks came parallels between the situations in the tax frail southern under pressure, as investors continue to see European economies.

The two Iberian countries are in the eye of a storm which has already Greece and Ireland as victims. Both Spain and Portugal little or even no growth are to spiraling debt and perspectives of cost-cutting measures in coming years due to the heavy government wide budget gaps have faced.

In a sign of increased stress, the cost of insurance of Portuguese debt against default rose again Friday. Yield spreads on Portuguese and Spanish Government bonds compared also widened with their German counterparts despite news that Brazil can aid to its former colonial master by buying Portuguese debt or negotiations credit lines is studied.

Portuguese Finance Minister Fernando Teixeira dos Santos said Thursday after a meeting with his Brazilian counterpart Portugal wants to diversify the market for government debt and said that Brazil is considering purchase Portuguese bonds.

He said Brazil's Finance Minister Guido Mantega Friday the possibility referred his country purchase Portuguese debt to Brazil's Central Bank, which the reserves of the country is responsible for investments. Mr Mantega said he believes other measures such as special credit lines would be more effective.

Banking fell Portugal and Spain shares after the warning. Moody's said to check for a downgrade is Banco Comercial Português SA, Banco Espírito Santo SA, Banco BPI SA, State Caixa Geral de Depósitos ratings of 10 Portuguese banks, including the largest - SA and Totta SA, the local unit of Spanish giant Banco Santander SA.

For the Iberian banks, difficult market conditions have aroused funding hurdles. With only a few investors willing to lend you money turned banks to this year the ECB for financing. Although cheap, such funding is short term and temporary. It carries a significant stigma because the ECB status as a lender of last resort. Significant increase in governing borrowing by a country tend to funding stress in the local banking system.In the Lead-Up to Ireland's recent 67.5 billion € ($ 89.34 billion) bailout, Irish banks increasingly turned to the ECB for funds, to effectively the debt markets specify frozen.

Moved recently, banks in Spain and Portugal of short-term funds have through their dependence on the ECB to another source aggressively increase your use receives from repurchase agreements where you borrow money from an investor, the securities as collateral, say bankers in both countries.

Moody's late Thursday said that banks access to financial resources, the cost of the current support of the central bank liquidity and strategies to reduce dependence on such support will focus on its review of the Portuguese banks.

Standard & poor's a similar warning issued last week on Portuguese banks after it put Portugal credit rating in the year under review. Fitch Ratings has already downgraded Portuguese banks, citing continued funding and liquidity constraints.

"Something expected a possible downgrade problems of debt for Portuguese banks can translate in ratings in higher refinancing costs in the future", said Carlos Peixoto, analyst at Lisbon-based BPI brokerage.

Analysts say an option for banks, editing, loans and deposits, will increase, makes you less on external funding is directed. However, lift deposits challenge will be - increased including pay cuts for public workers and taxes - as Iberian Governments verhängen-tough measures to workers of the country to reduce their budget deficits.

Portuguese banks have met all your refinancing needs for 2010, but biggest three acting ones - BCP, BES and BPI - have to refinance € 9 billion next year and € 10 billion in 2012.

In much larger Spain face banking terms of about €88 billion next year, with the majority of due in the first half of the year according to the data that of Barclays Capital collected.

At 1600 GMT Portugal BCP shares fell 0.9% for effectively. 63, BES is 1.3% to EUR3. 02 and Banco BPI was 1.7% to EUR1. 51. Were in Madrid Santander shares by 2.5% to EUR8. 29 during chief rival Banco Bilbao Vizcaya Argentaria is 1.8% to EUR8. 01 was. Smaller peers were also suffer, Banco Sabadell 1.8% lose at Eur3. 26 and Banco Popular is 2.1% to EUR4. 23.

Write toAlex MacDonald alex.macdonald@dowjones.com and Patricia Kowsmann at the patricia.kowsmann@dowjones.com

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