Portugal is trading in default territory after investors offloaded the country's bonds this week amid rising fears of contagion, hurting a government debt auction on Wednesday. Worries are mounting that the private sector and Greece will fail to agree a restructuring package for Athens' debt.


Many investors were forced to sell Portuguese bonds after Standard & Poor's downgraded the country to junk on Friday. Other funds sold Portuguese debt after Lisbon was removed from Citigroup's European Bond Index, which these investors track, because of its fall to junk status.

All three main credit rating agencies, S&P, Moody's, and Fitch, rate Portugal as junk, below investment grade. In the eurozone, only Greece is also rated junk by all the agencies.

The markets are pricing in a 65 per cent chance that Portugal will default over the next five years, according to credit default swaps. These instruments, which protect some investors from default, while others use them as a speculative device, leapt to record highs this week.

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