Standard & Poor's Ratings Services said Tuesday that it is considering a downgrade of its ratings for Portugal's debt because of the nation's economic woes.
The ratings agency placed Portugal's credit ratings on "CreditWatch" based on concerns about its growth prospects in light of an impending austerity program, and increased risks to the government's creditworthiness.
Portugal is widely considered the next European nation likely to need a bailout. If it does seek help from the European Union, S&P credit analyst Frank Gill said the terms of the deal will be considered in its ratings review.
Also a major consideration will be government actions related to its austerity program, which S&P said will create a drag on the economy. Government policies "have done little to boost labor flexibility and productivity," the agency said. It forecasts the Portuguese economy will shrink by at least 2 percent next year.
In addition, S&P said the large amount of debt held by non-residents increases the government's vulnerability to rising real interest rates. That adds to the country's need for a large amount of external financing and increases the likelihood Portugal will have to seek help from the European Union.
Concerns about the further spread of the debt crisis that has already led to Greece and Ireland getting EU assistance have unsettled world markets. Like Greece and Ireland, Portugal is relatively small, but if the problems spread further, the far larger economies of Spain and Italy could be next.
S&P said the review will take about three months. If Portugal gets help from the EU, or if its economy worsens, the long-term "A-" and short-term "A-2" ratings could be cut, but the agency said they would remain in the investment grade category. If no bailout is needed or the country passes growth-enhancing reforms, Gill said the ratings will be kept at their current levels.
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