Debt-strained Portugal can still avoid a bailout although political upheaval following the sudden departure of its prime minister made one more likely, the head of the OECD said on Thursday.
Angel Gurria, the secretary-general of the Organisation for Economic Co-operation and Development, expressed frustration that political turmoil in Portugal had led to what he called a partly "self-inflicted injury," and said troubles there would pile pressure on other vulnerable euro zone countries.
"If you're giving signs of distress, the markets pick those up immediately. The markets are like heat-seeking missiles -- they're weakness-seeking missiles -- and wherever they see vulnerability, they focus," Gurria said after giving a speech in Washington.
Portuguese Prime Minister Jose Socrates quit on Wednesday after parliament rejected new austerity measures, which his government unveiled to avoid being forced to seek EU/IMF financial assistance. For details, see 1/8ID:nLDE72N214 3/8
When asked whether a bailout was unavoidable, Gurria replied, "No, I would not say it is, but the problem is it (political trouble) makes it more likely."
He said Portugal was in for a "rocky few weeks" before it can hold a snap election. The political problems sowed doubt about whether Portugal would follow through on promised reforms, and that left credit markets uncertain.
As for other heavily indebted European countries, Gurria said Portugal's problems had ramifications for everybody and he urged policymakers to consider systemic importance, not just their own domestic circumstances.
He said Spain, which has been under scrutiny over its public finances, had been "admirable" in its efforts to address problems with its deficit, labor markets and pensions, yet it could face market pressure because of Portugal.
Ratings agency Fitch cut Portugal's credit rating by two notches on Thursday and warned that further downgrades are likely in the next three to six months, especially in the absence of a "timely and credible" program of financial support from the International Monetary Fund and European Union.
Gurria, who was speaking before the Fitch downgrade was announced, chastised ratings agencies in general for issuing downgrades in the midst of turmoil. He said they had played a "procyclical" role in exacerbating the debt crisis, adding that this was "the most elegant term I can use."
(Additional reporting by Walter Brandimarte in New York; editing by Neil Stempleman)