Moody's credit rating agency downgraded Portugal's debt on Tuesday, casting fresh doubt on the country's ability to weather its debt crisis as the economy weakens.
Moody's Investors Service cut Portugal's government bond ratings to A1 from Aa2. The move deepens the country's financial woes because foreign lenders will likely demand higher interest returns for the risk of loaning it money.
Portugal's financial ordeal is part of a government debt crisis that has engulfed the euro zone and weighed on the shared currency. The cuts in Portugal's rating by international agencies in recent months have stoked market concerns that the crisis, which led Greece to the brink of bankruptcy and a bailout, could spread to other financially troubled countries in the euro zone.
The government debt agency is scheduled to auction at least 1 billion euros ($1.25 billion) in bonds on Wednesday. So far this year Portugal has experienced no liquidity problems and no difficulty raising money on international markets.
Moody's said feeble growth and climbing debt levels over the past two years will continue to sap Portugal's fiscal strength.
The budget deficit ballooned to 9.4 percent of GDP last year, the fourth highest rate in the euro zone. During the same year, the economy contracted 2.7 percent amid the global downturn.
The center-left Socialist government has enacted an austerity package to slash the debt but has struggled to find new sources of economic growth.
Moody's said it expects the government's debt situation "to continue to deteriorate for at least another two to three years" before stabilizing.
Portuguese Finance Minister Fernando Teixeira dos Santos said the downgrade, which followed cuts by other rating agencies, including Standard and Poor's, was expected.
"There is no point grieving over this," Teixeira dos Santos said. "We have to do what the markets demand, which is swiftly put our public finances in order."
The government has set a deficit target of 5.1 percent for 2011, and intends to get the deficit below 3 percent the following year, but financial markets are worried the austerity plan could choke a recovery.
The financial crisis, and the government's measures to address it, have been blamed for pushing the jobless rate to almost 11 percent, one of the highest levels in the euro zone.
The minority government, which has resisted trade union protests over a civil service pay freeze and tax hikes, has pointed to recent signs of fresh growth as evidence its policies are working. In the first quarter, Portugal's gross domestic product rose 1.7 percent from the same period a year earlier — the strongest recovery in the European Union.
Goncalo Pascoal, chief economist at Portuguese bank Millennium bcp, said that while growth has been robust so far Portugal's recovery could still be checked by the austerity measures and continuing difficulties in its main export markets, especially Spain.
"We don't know if the growth will continue," he said.
Moody's said its outlook for Portugal remains "stable," meaning it is not expected to downgrade its rating further in coming months.
"Whilst the government's debt metrics have undoubtedly deteriorated, Moody's believes that they will stabilize at levels that are commensurate with a strong A rating," the agency said. "In our view, upside and downside risks to that base case scenario are evenly balanced."
The Portuguese Finance Ministry said that its debt-cutting strategy would remain in place.
While cuts might not guarantee a quick rebound, "it is nevertheless a necessary condition for a sustained economic recovery," the statement said.
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