Its long-term government bond ratings are now rated at Ba2, down from Baa1, on top of a negative outlook. At the same time, it has also downgraded its short-term debt rating to not-prime from prime-2.
According to Anthony Thomas, a senior analyst in Moody’s Investor Services sovereign risk group, one of the drivers for the downgrades is “the 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”.
He added that “the increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter” was another key driver for Moody’s decision.
Portugal’s government, however, hit back saying that Moody’a has not considered the austerity measures it has already put in place including an extraordinary income tax charge. Its finance ministry added that the measures announced have already had the backing of the European Union, its central bank and the International Monetary Fund.
There are also concerns that Portugal cannot make the existing deficit reduction targets from its first bailout, of €78bn (£70m), in May last year following Ireland and Greece. Its target was to reduce its deficit to 3% of GDP by 2013. Last year the figure was 9.1%.
At the same time, EU leaders are still debating what should happen to Greek debt, with the French proposing banks should be asked to roll over on billions of euros of Greek debt.
