Moody's has cut Portugal's long-term debt rating by two steps, citing a weaker growth outlook, risks to the government's deficit- reduction plans and a possible need to recapitalise its banks.
The rating was downgraded to A3, four steps from so-called junk status, according to Moody's, with the outlook on the grade "negative".
Portugal is trying to rein in the euro region's fourth- biggest budget deficit and avoid the bailouts that Greece and Ireland needed. With the economy forecast to contract this year, the government is raising taxes and carrying out the deepest spending cuts in more than three decades, aiming to convince investors it can curb its debt.
"The government faces significant challenges, not least a less supportive economic environment," Moody's said in its statement. Gross domestic product is expected to decline this year and experience a weak recovery "at best" in 2012, it said.
Moody's said its rating takes into account measures announced by prime minister Jose Socrates's government last week and is driven by "ambitious" fiscal goals and subdued" growth prospects. It also said higher interest rates from the European Central Bank may compound the nation's fiscal problem.
"Rising inflationary pressures could lead to an increase in the ECB's policy rate, which could aggravate the Portuguese government's funding costs and put additional pressure on private-sector borrowing costs," Moody's said. "Should oil prices rise further and remain high for over a long period, external imbalances would worsen, given Portugal's dependence on imported energy."
The spread between Portuguese and German 10-year bond yields was at 427 basis points yesterday after reaching a euro-era record of 484 on November 11th.
Ireland in November became the second euro country after Greece to seek a bailout and the first to request aid from the European Financial Stability Facility.
Portugal's 10-year bond yield climbed to a euro-era record of 7.70 per cent on March 9th, according to data compiled by Bloomberg.
Portugal intends to sell as much as €20 billion of bonds this year to finance its budget and cover the cost of maturing debt. Portugal doesn't face any debt redemptions until April, with repayments that month and in June worth about €9 billion. It faces bill maturities in March, July, August, September, October and November.
Bloomberg
