Moody’s Downgrades Portugal’s Rating

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.