|Tens of thousands of people have taken to Portugal's streets to protest against austerity measures [AFP]
Portugal's credit standing has been cut to junk by Moody's Investors Service in the first such move by a credit ratings agency.
Moody's also warned on Tuesday that the country may well need a second round of rescue funds before it can return to capital markets.
The agency slashed Portugal's credit rating by four levels, to Ba2, causing the debt-laden Iberian country to follow Greece into junk territory below investment grade. Greece is rated much lower, at Caa1.
Portugal in April became the third eurozone country to request a bailout, after Greece and Ireland.
Moody's cited heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union (EU) and International Monetary Fund (IMF).
Portugal is receiving funds from a three-year, $113bn EU/IMF bailout programme and does not need to issue long-term debt in the market until 2013.
But Moody's said there is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter.
Moody's said there was a "growing risk that Portugal will require a second round of official financing before it can return to the private market".
"And the increasing possibility that private sector creditor participation will be required as a pre-condition."
It also said Portugal faced formidable challenges in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.
Of the three major ratings agencies, Standard & Poor's and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range.
Portugal's new centre-right government said in a statement that Moody's did not take into account strong political backing for austerity measures after a June 5 election, and an extraordinary tax announced last week.
Unlike the previous minority Socialist government, the new ruling coalition has a comfortable majority in parliament to pass austerity measures and reforms.
It did acknowledge, though, that the rating cut "shows the vulnerability of the country's economy amid a debt crisis".
The government also reaffirmed commitment to deepening and speeding up austerity measures that the country vowed to implement under its bailout pact, saying a strong macroeconomic adjustment was "the only way to reverse the course and restore confidence".
The country has to slash its budget deficit to 5.9 per cent of gross domestic product this year after overshooting its target last year, when the gap was 9.2 per cent, and then reduce it to 3 per cent by the end of 2013.