LISBON, Portugal — Portugal's financial plight deepened Wednesday, with borrowing rates jumping higher and stocks slumping after its bonds were downgraded to junk status. Spain and Italy were dragged into the downturn, adding momentum to Europe's sovereign debt crisis.
Portugal's hopes of slowly emerging from its debt crisis were knocked by ratings agency Moody's, which downgraded Portugal's debt four notches Tuesday and said the country will likely follow Greece in needing a second rescue package.
Portugal took a $112 billion bailout from its European partners and the International Monetary Fund earlier this year after nervous investors began charging it unsustainably steep returns on loans.
After the abrupt worsening of Portugal's financial situation, neighboring Spain immediately suffered a knock-on effect, with Madrid's main stock index down 1.2 percent and bond yields rising. Spain, a much bigger country, until now has managed to dodge major fallout from the continent's fiscal woes.
The jitters were even felt in Italy, where stocks closed down 2.4 percent on concerns that spending cuts might not be enough to bring down high debt.
The idea that the crisis might grow to engulf larger economies is a looming threat for markets. Rescuing Spain and Italy would be many times more expensive than all the bailouts the EU has paid for so far.
The Moody's downgrade — viewed by some as unexpectedly harsh — triggered new outrage in Portugal, where austerity measures over the past year have included tax hikes, pay freezes and welfare cuts.
Portuguese Prime Minister Pedro Passos Coelho said the downgrade was "like a punch in the stomach." Fernando Faria de Oliveira, the head of Portugal's largest bank, the state-owned Caixa Geral de Depositos, called it immoral and insulting.
The yield on Portuguese 10-year bonds surged to 13 percent, while the Lisbon stock exchange fell 3 percent.
Part of Moody's rationale for the downgrade was that the EU's determination to get private sector investors to share the burden of bailouts, as being discussed for Greece, increases the chances of Portugal being shut out of the market beyond 2013, when it hopes to resume bond issues.
Portugal faces a daunting task in reducing its debt — it is in a recession, with its economy expected to contract 4 percent through next year, and unemployment stands at 12.4 percent.