Bloomberg

The risk of losses on European government bonds is mounting as the economic slowdown threatens credit ratings in Ireland, Portugal, Spain and Greece.

Credit-default swaps tied to the debt of Ireland rose more than seven-fold since September to 217 today, while those for Spain rose about 71 basis points to 122, Portugal increased 80 to 120 and Greece jumped 160 to 238, according to CMA Datavision in London. Contracts linked to the debt of lower-rated Mexico and Vietnam fell in the same period.(…)

“The peripheral countries are coming under pressure,” said Ian Stannard, a currency strategist at BNP Paribas SA in London. “Given the huge supply of bonds that’s due, this is going to make things more tricky. It’s going to leave the euro extremely vulnerable.”(…)

Portugal yesterday became the third euro nation in a week to be threatened with a debt downgrade when Standard & Poor’s said the country’s long-term rating may be lowered from AA-.

“In our opinion, Portugal faces increasingly difficult challenges as it tries to boost competitiveness and persistently low growth against the backdrop of a heavy debt burden and very high imbalances,” S&P said in a statement. Government attempts at reform “have proven insufficient,” it said.

Portugal’s government forecast that it will record a budget deficit of 3 percent of gross domestic product in 2009, the edge of the European Union’s limit under the Stability and Growth Pact. The economy will contract this year for the first time since 2003 as its main export markets weaken and Portuguese consumers rein in spending, the central bank forecast Jan. 6.

S&P said Jan. 12 that Spain faced “significant challenges” and may have its top AAA classification lowered. Greece was put on watch for a possible cut as sliding support for the government hampers the country’s ability to ride out the economic crisis, S&P said Jan. 9. The same day, it lowered the outlook for Ireland’s debt to “negative” from “stable.” Credit- default swaps on Portugal rose 13.5 basis points to 120 basis points after S&P’s move, up from about 40 basis points in September. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. An increase signals deterioration in the perception of credit quality; a decrease, the opposite.