Portugal's debt rating downgraded

A leading credit rating agency downgraded Portugal's debt Wednesday amid growing concerns about the government's ability to service its borrowings, another piece of bad news for Europe as it struggles to deal with a debt crisis.

Fitch Ratings said Portugal's prospects for recovery are weaker than those of other countries that use the euro, adding that this will make it harder to shrink its budget deficit over the medium term.

"A sizable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal's creditworthiness," said Douglas Renwick, associate director in Fitch's sovereign team.

In 2009, Portugal had a deficit representing 9.3 per cent of its national income. That was higher than the 6.5 per cent forecast by Fitch as recently as September and underlines why the ratings agency lowered its rating on the country by one notch to AA-.

Despite the downgrade, Portugal's debt is still considered investment grade and still a few notches above its rating of crisis-stricken Greece.

Outlook negative

However, Fitch said the outlook remains negative and a further downgrade could be in the offing if the recovery is not as strong as anticipated in the coming two years.

Fitch said the negative outlook reflects its concerns about the potential impact of the global economic crisis on Portugal's economy and public finances, given the country's structural weaknesses and high indebtedness across all sectors of the economy.

Fitch said the Portuguese government has to implement "sizable" spending cuts and tax increases to meet its target of getting its deficit to three per cent of economic output by 2013.

Though the government's recently announced budget plans were "broadly credible," Fitch said "the risk of macroeconomic disappointment — with knock-on effects to the deficit — is significant, particularly in the latter years of the government's projection."

Further underperformance in 2010 and 2011, on the budget or the economy in general, could lead to another downgrade, Fitch said.