Moody's cuts Portugal's debt rating to junk

Credit rating agency Moody’s has downgraded Portugal’s sovereign credit rating by four notches to ‘junk’ status.

Moody’s blamed Portugal’s rising likelihood of needing another massive injection of international bailout funding before it becomes able to rely on private credit again.

It also warned of a growing risk that private sector creditors would, as in Greece’s situation, be required to cut the value of their bondholdings before such a second bailout could take place.

Moody’s cut the peripheral Eurozone country’s long-term government bond rating to Ba2, with a negative outlook, from Baa1 and reduced its short-term debt rating to (P) Not-Prime from (P) Prime-2.

It believes Portugal is unlikely to fully achieve its targets to cut its deficit to three per cent by 2013, from 9.1 per cent in 2010, or stabilise its debt to GDP ratio as specified in the loan agreement with the European Union and International Monetary Fund.

Moody’s said this was “due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.”

“Although Portugal's Ba2 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well,” it added.