Moody's slashes Portugal's credit standing to junk
MOODY'S last night cut Portugal's credit standing to junk, in the first such move by a ratings agency, and warned that the country may well need a second round of rescue funds before it can return to capital markets.
Moody's Investors Service slashed Portugal's credit rating by four levels to Ba2, following Greece into junk territory below investment grade.
It cited heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union and International Monetary Fund.
There also is an increasing probability that Portugal will not be able to borrow at sustainable rates in capital markets in 2013 and for some time thereafter, the agency said.
Portugal is receiving funds from a three-year, €78bn EU/IMF bailout programme and does not need to issue long-term debt in the market until 2013. The country faces formidable challenges in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system, Moody's said.
Out of the three major ratings agencies, Standard & Poor's and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range.
Portugal's new centre-right government said in a statement that Moody's did not take into account strong political backing for austerity after a June 5 election and an extraordinary tax announced last week.
It did acknowledge, though, that the four-notch ratings cut "shows the vulnerability of the country's economy".
It also reaffirmed a commitment to deepening and speeding up austerity measures that the country vowed to implement under its €78bn bailout programme, saying a strong macroeconomic adjustment was "the only way to reverse the course and restore confidence" in Portugal.
Robert Tipp, chief investment strategist at Prudential Fixed Income, said the downgrade showed the European debt crisis was unlikely to stop at Greece.