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Portugal's debt rating downgraded


Moody's has downgraded Portugal's debt rating again

Moody's has downgraded Portugal's debt rating again

Moody's has downgraded Portugal's debt rating again

Moody's has downgraded Portugal's debt rating again and warned that the debt-laden euro country may suffer another cut because of heightened political, budgetary and economic uncertainties.

The agency said it had cut its rating on Portugal's bonds by one notch to Baa1 from A3 and placed the rating on review for another downgrade.

The downgrade is Moody's second in less than a month and further illustrates the difficulties Portugal is facing if it is to avoid joining Greece and Ireland in seeking a financial rescue package.

Moody's said the range of difficulties, including the upcoming general election on June 5, increase the risk that Portugal will be unable to achieve the outgoing government's ambitious deficit reduction targets over the coming three years and put the public finances into shape.

Moody's also said the recent agreement to replace the current bail-out fund with the European Stability Mechanism from 2013 acted as an additional trigger for the downgrade as it contemplates the possibility of a debt restructuring within the euro area.

Though the election following last month's resignation of the previous government complicates how Portugal can tap the EU's current bail-out fund, Moody's reckons other countries in the eurozone would provide Portugal with help if required in the interim period.

However, once the election is out of the way, Moody's said it expects the new government will "likely approach the facility as a matter of urgency".

Approaching its partners may become inevitable if Portugal's ability to tap bond market investors dries up. The country faces a couple of key tests over the coming months. As well as having to repay a 4.5 billion euro (£4 billion) loan in April, it has an almost 5 billion euro (£4.4 billion) bond repayment two months later.

Moody's said it is "very unlikely" that the long-term debt markets will reopen to the Portuguese government or to the Portuguese banks to any meaningful extent until the government can take action to dispel doubts over its commitment and ability to implement its adjustment programme.

With the country's borrowing costs seemingly hitting a record euro-era high on a daily basis, investors think it is becoming increasingly unlikely that Portugal will be able to deal with its problems on its own.