Moody’s Investor Services announced Tuesday that it has downgraded the long-term government bond rating for Portugal from Baa1 to Ba2 and assigned the country a negative outlook.
The short-term debt rating was also downgraded.
Moody’s downgraded the country’s rating on the increased risk that Portugal will need a second round of financing before it can return to the private market.
Moody’s noted in a statement that while Portugal’s downgrade indicates a much lower risk of restructuring than Greece’s Caa1 rating, “the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future.”
Also contributing to the downgrade are growing concerns that Portugal will not be able to meet the deficit reduction target of 3% by 2013 laid out in the loan agreement with the European Union and the International Monetary Fund.
Moody’s is specifically worried about Portugal’s ability to fully implement its plans to reduce spending in sectors such as health care, state-owned enterprises, and regional and local governments. Additionally, plans to improve tax compliance within established timeframes and weaker-than-expected economic growth, exacerbated by fiscal consolidation and deleveraging, may limit the country’s ability to reduce the budget deficit.
Finally, there is a “non-negligible possibility” that Portugal's banking sector will need more support than what is currently outlined in its loan agreement with the EU and the IMF. “Any capital infusion into the banking system from the government would add additional debt to its balance sheet,” according to Moody’s.
Earlier concerns about the country’s political stability are “largely resolved,” Moody’s notes, before adding that “significant slippage” in implementing the fiscal consolidation program could result in another downgrade.