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Rating cut over Portugal debt fears
Finance minister urges MPs to pass austerity measures after debts reach $167bn.
Last Modified: 25 Mar 2010 06:01 GMT
Dos Santos said that austerity measures must be passed to reassure 'economic players' [EPA]

Portugal's sovereign credit rating has been downgraded by Fitch Ratings amid growing concerns about the Lisbon government's ability to service its debts.

The cut in the rating from AA to AA- was the latest blow to nations using the euro after concerns over a debt crisis in Greece and pushed the value of the currency under $1.34 for the first time in 10 months. 

Lisbon's main PSI-20 stock market index tumbled more than two per cent on the news.

Fitch Ratings said that Portugal's prospects for recovery were weaker other country's in the eurozone, adding that this will put make it harder to shrink its budget deficit over the medium term.

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

The downgrade was the result of "significant budgetary underperformance in 2009", with the country's debt reaching $167bn, 76.6 per cent of gross domestic product.

Austerity measures

Portugal's minority Socialist government responded by urging parliament to back a series of austerity measures aimed reducing the public deficit from 9.3 per cent of output to under the eurozone limit of 3.0  percent by 2013. 

"Under the current situation of nervousness and volatility in the international financial markets ... it is essential for Portugal to show a firm political commitment to implement its growth and stability programme," the finance ministry said in a statement.

The programme, which forecasts slight economic growth of 0.7 per cent this  year, includes a four-year freeze of government salaries, a reduction of social benefits and a delay in public investment.

The conservatives, who hold 102 of 230 seats, have yet to  indicate how they will vote while 31 MPs from left-leaning parties will vote no. The Socialists hold 93 seats.

Fernando Teixeira dos Santos, the finance minister, warned that were the vote to fail "economic players would not believe in our ability to correct the deficit and control the debt, which would undermine confidence and would compromise the prospects for our economy."

Greece comparison

The credit rating announcement came a day before eurozone leaders were expected to meet in Brussles to discuss a mechanism to allow debt-ridden Greece borrow more cheaply.

Greece faces the prospect of refinancing 20 billion euros of debt in April and May at twice the rate Germany has to pay to borrow.

Analysts cautioned that conditions in Portugal were still seen as more favourable than those in Greece. 

"The market is taking it very well. AA- is still respectable credit and bears no comparison with Greece," Kenneth Broux, an economist at Lloyds TSB, said. Fitch rates Greece BBB+.

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

Source:
Agencies
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