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Portugal's debt rating downgraded by Fitch

(Agencies)
Updated: 2010-12-24 09:29

LONDON - Portugal has had its credit rating downgraded by the Fitch Ratings agency amid mounting concerns over the country's ability to raise money in the markets to finance its hefty borrowings.

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Fitch said Thursday it was reducing its rating on the country's debt by one notch to A+ from AA- and warned that further downgrades may be in the offing by maintaining its negative outlook.

"The downgrade reflects an even slower reduction in the current account deficit and a much more difficult financing environment for the Portuguese government and banks than incorporated into Fitch's previous rating (in March), as well as a deteriorating near-term economic outlook," Fitch said in a statement.

Fitch's downgrade follows a warning earlier this week from rival Moody's Investor Services that it may cut its A1 rating on Portugal by a notch or two because of uncertain economic growth, the high cost of borrowing on global markets and worries about the banking sector.

Fitch's reasoning is very similar and is likely to stoke renewed speculation that Portugal could well be the next country using the euro in need of financial help from its partners in the European Union and the International Monetary Fund - Greece and Ireland have already suffered the ignominy of being bailed out.

The agency said the Portuguese government would likely meet its target of reducing its budget deficit to 7.3 percent of national income this year, but voiced concerns that this is heavily dependent on one-time measures, which don't make a dent on the long-term state of the public finances.

As a result, Fitch said the government will find it "extremely challenging" getting the budget into shape, especially if, as the agency expects, the economy falls into recession next year.

The Portuguese government aims to reduce the budget deficit to 3 percent of GDP by 2012 and to just 2 percent of 2013, which would be extremely difficult if the euro zone's smallest economy starts to contract again - in effect, lower growth means lower tax receipts and higher social spending, hardly conducive to budgetary health.

"Failure to meet its 2011 budget headline and structural deficit targets would erode confidence in the medium-term sustainability of public finances that underpins Portugal's current sovereign ratings," Fitch said.

Confidence is particularly important if Portugal is going to be able to avoid the same fate which befell Greece and Ireland. If investors lose confidence in the budget plan, then the country's cost of borrowing in the markets - already considered to be a long-term unsustainable rate of nearly 7 percent - will rise further.

Fitch said that so far, Portuguese officials have managed to withstand the pressure, partly by articulating a coherent bond issue strategy to investors and partly by ongoing reforms to the labor market and the education system.

The reforms are aimed at building up the country's competitiveness, which should help rebalance the economy in favor of exports and ultimately lead to an improvement in the current account deficit.

Portugal's current account deficit, effectively its trade deficit, has averaged around 10 percent of GDP over the last decade and net debt is equivalent to 90 percent of GDP, the third-highest in the euro zone.

"Insufficient progress in rebalancing of the economy, including a reduction in the current account deficit to a more sustainable level, over the next few years would be negative for sovereign creditworthiness," Fitch said.