Increasing debt levels and a foundering economy were the reasons Fitch Ratings cited on Thursday for cutting Portugal’s credit rating to junk. This was after Standard & Poor’s boosted Iceland’s credit rating outlook from negative to stable on Wednesday, as the country’s growth after its financial meltdown in 2008 brought it to the next step in its recovery.
Bloomberg reported that Fitch dropped Portugal to BBB- from BB+, with a negative outlook; the country’s 10-year bonds fell after the announcement, with yields increasing 16 basis points in early trading Wednesday. The Portuguese economy is expected to shrink by 3% next year, the only euro zone economy that the European Commission has predicted will shrink, besides Greece.
In making its ratings cut, Fitch said in a statement, “The country’s large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign’s credit profile is no longer consistent with an investment grade rating.” Iceland is already rated as junk by Fitch, but S&P ranks it at its lowest investment grade level of BBB-/A-3.