Fitch cuts Portugal credit rating to junk status

PARIS—Fitch ratings agency cut the credit standing of bailed-out Portugal by one notch to ‘BB+,’ junk-bond status, on Thursday because of its high level of debt and weak economic outlook.

Fitch said the rating has a negative outlook, meaning it could be lowered again, citing Portugal’s “large fiscal imbalances, high indebtedness across all sectors and adverse macroeconomic outlook” for the downgrade.

Any Fitch rating of BB is deemed speculative quality – or ‘junk’ in market slang – while a downgrade typically increases the borrowing costs as the country concerned is now deemed a bigger risk.

In early afternoon trading, the benchmark Portuguese 10-year bond was trading with a yield or rate of return for holders of 11.036 percent, up from 10.944 percent at the close Wednesday. The stock market was down 0.82 percent.

Fitch said Portugal – bailed out by the EU and International Monetary Fund to the tune of 78 billion euros earlier this year – would see its economy shrink 3.0 percent next year, making government efforts to stabilize the public finances even more difficult.

It said the government’s commitment to the reforms laid down in the bailout program was strong and it should meet this year’s public deficit target of 5.9 percent of gross domestic product.

The 2012 budget drawn up by the new conservative government elected in June “contains significant expenditure reductions, mainly on pensions and civil service pay.

“The budget is well designed and is based on reasonable GDP assumptions. Fitch therefore expects the 4.5 percent deficit target for 2012 to be met,” it said, while warning of large risks of slippage.

It said it expected total accumulated government debt to increase from 93.3 percent of GDP at end-2010 to around 110 percent at end-2011 and peak at around 116 percent at end-2013.

“The sovereign crisis poses significant risks to the banking system, which lends to one of the most indebted private sectors in Europe,” Fitch said, warning that the banks will need fresh help from the European Central Bank.

Portugal was bailed out after fellow eurozone strugglers Greece and Ireland needed rescues in 2010 to save them from default, with the debt crisis since spreading steadily to snare Italy and Spain.

The harsh austerity measures introduced by Lisbon in an effort to stabilize the economy have proved hugely unpopular and on Thursday a general strike paralyzed public transport.

“The strike is a sacrifice for the good of the country,” said Manuel Carvalho da Silva, secretary general of the CGTP union, which along with Portugal’s other main union the UGT had called the strike action.

“It is a red card to the government for its actions that are driving the country to poverty,” da Silva said.