Portugal hit by debt downgrade from ratings agency

Traders during Portuguese debt auction
Image caption The ratings downgrade will probably make it more expensive for the Portuguese to borrow money

Moody's has downgraded Portugal's sovereign debt rating, citing the country's need to cut debt and its poor growth prospects.

The ratings agency cut Portugal by two notches from A1 to A3 and kept the rating on a negative outlook, suggesting more downgrades may follow.

Meanwhile, Portugal's main opposition party has announced it will oppose the government's austerity plans.

The prime minister has warned the country could face a bail-out.

"The consequence of a political crisis would worsen the risks for our economy and lead to intervention," he said.

Portugal is burdened with high levels of debt and is struggling to avoid an international bail-out, similar to those of Greece and the Republic of Ireland.

Political deadlock

Prime Minister Jose Socrates' government unveiled the latest in a series of austerity measures last Friday.

The plans, which included cuts to health and welfare budgets, were meant to reassure investors and fellow European Union members that it can meet its debt obligations without the need for outside help.

However, the austerity package has met with fierce opposition, and the prime minister has warned that if the measures fail to win support, his country may be forced into a bail-out.

The main opposition party has now decided to formally oppose the plans, which could lead to political deadlock.

This could bring down the current minority government, forcing a general election.

"I have been fighting to avoid this scenario for six months," Mr Socrates told Portuguese television.

Negative outlook

Despite Moody's two-notch downgrade, the agency still rates Portugal as "investment grade" and the country remains several notches above the more risky "speculative grade" ratings it has given to Greece.

"The cost of market funding is likely to remain high until the deficit has been reduced to a sustainable level and the prospects for economic growth have improved," said Moody's in a statement.

Portugal on Wednesday sold 1bn euros worth of 12-month treasury bills at an auction.

The yield on the debt was 4.331%, up from 4.057% at a previous sale on 2 March but below the record levels seen in December.

Demand from investors was also less than at the last auction earlier this month.

The downgrade is likely to make it even more expensive for Portugal to raise money on the international debt markets.

The country's 10-year cost of borrowing hit a new high of nearly 8% last week, and has remained above 7.5% since.

Moody's has also given a negative outlook on the new rating, which means its rating could be downgraded further.

This indicates that Moody's is unsure that the Portuguese government will be able to deliver on the reforms it has recently announced.

Standard and Poor's, another ratings agency, recently announced that it is also reviewing Portugal's A- debt rating - equivalent to Moody's A3 rating - for a possible downgrade.

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