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• Moody's puts Portugal under review
• Agency concerned about 'long-term vitality'
• Interest on Portuguese government debt hits 6.46%
Portugal was hit with the threat of a credit rating downgrade this morning over fears that its austerity cutbacks will hurt economic growth next year.
Just days after slashing Ireland's credit rating by five notches, Moody's warned it has put Portugal's rating on review for a possible downgrade. The agency said it was concerned about the country's "long-term economic vitality" after swingeing spending cuts and tax hikes are implemented.
Moody's also predicted that Portugal will struggle to borrow from the financial markets, which could force it to seek a rescue package. It currently rates Portuguese sovereign debt as A1, which is its fifth-highest rating, six notches above "junk".
"In Moody's opinion, Portugal's solvency is not in question," says Anthony Thomas, Moody's lead analyst for Portugal, "but the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy's ability to withstand fiscal consolidation … mean its outlook may no longer be consistent with an A1 rating."
Thomas added that Portugal risks being dragged into a situation where rising interest payments significantly drive up the cost of servicing its debts.
"The markets have remained open to the Portuguese government … but it is having to pay an elevated price, which if sustained will increase substantially its debt service costs over time," he said.
The review is likely to take three months.
Portugal could turn to the European Financial Support Fund if it cannot borrow from the financial markets on affordable terms. Thomas said this would help to address "short-term uncertainties", but also raise concerns over Portugal's medium-term prospects.
Portuguese government debt fell this morning, pushing up the yield, or rate of return demanded by investors. Yields hit 6.46% this morning, higher than the average interest rate of 5.8% that Ireland is paying for its €85bn bailout.
The Portuguese government is already implementing a range of cuts in an effort to avoid becoming another victim of Europe's sovereign debt crisis. Its deficit hit 9.4% of GDP last year, and prime minister Jose Socrates hopes to cut it to 7.3% this year, and 4.6% by the end of 2011.
Late last month the Portuguese parliament approved an austerity budget that will raise income and sales taxes, and cut the wages of some civil servants. The country's labour laws are also being reformed in an attempt to reassure the financial markets. The moves are deeply unpopular and led to a general strike last month.
Portugal is the fourth member of the eurozone to feel the heat from the credit rating agencies in recent days. Just over a week ago, Standard & Poor's cut Belgium's outlook to "negative" from "stable", and said it may cut its rating within six months. Moody's then warned last Wednesday that it might downgrade Spain's credit rating, and last Friday it cut Ireland's rating to just three notches above junk.
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