2nd UPDATE:Fitch Cuts Portugal Rating On Slow Deficit Reduction
By John Kell and Alex MacDonald
Of DOW JONES NEWSWIRES
LISBON (Dow Jones)--Fitch Ratings cut Portugal's credit rating on Thursday, dealing another blow to the country as it confronts the euro zone's sovereign debt crisis.
Fitch downgraded Portugal's sovereign debt credit rating due to concerns about the government's slow budget deficit reduction, deteriorating near-term economic outlook, and a "much more difficult" financing environment for the Portuguese government and its banks.
Ratings agencies Standard & Poor's Ratings Services and Moody's Investors Service voiced similar concerns this month when they warned that they may trim the nation's ratings as well.
The downgrade and credit reviews follow the Finance Ministry's announcement Wednesday that Portugal had cut its budget deficit for the first time this year in November.
The Fitch downgrade had muted impact on Portugal's sovereign debt. The yield spread between Portugal 10-year government bonds and the benchmark German bund rose slightly, to 365 basis points, around three basis points wider than before the downgrade, according to Tradeweb. Trading in European government bond markets has been very light in recent days as the Christmas holidays approach, traders said.
Fitch's said it would cut Portugal's long-term foreign debt rating by one notch to A+, placing it four notches below the highest rating.
Fitch also downgraded Hungary to one notch above junk status at BBB-, a move that came the same day parliament passed the 2011 budget bill. Fitch warned it will further cut Hungary's rating unless the new government implements credible medium-term fiscal consolidation measures.
Fitch expects Portugal to reduce its budget deficit to 7.3% of gross domestic product this year, down from 9.3% last year, but the government's harsh austerity measures will cause the economy to shrink by 1% next year, making it harder for the government to lower its budget deficit to 4.6% of GDP in 2011.
Fitch warned there is "little scope for slippage," because any failure to meet its 2011 budget deficit targets would erode confidence in the country's ability to control its public finances.
Fitch was more positive about a "sustainable recovery" in 2012 which should ease the burden of its foreign debt and budget.
Portugal has so far demonstrated it can retain access to market funding despite the sovereign debt crisis, Fitch said. The ratings agency based its current ratings decision on the assumption that Portugal will maintain its access to the financial markets and doesn't need help from the International Monetary Fund or the European Union.
Both Greece and Ireland recently accepted bailout packages from the IMF and the EU, prompting some investors to voice concern that Portugal and even Spain may also need help.
Prime Minister Jose Socrates previously said Portugal doesn't need to ask for external help and added the government has the means to cope with its own problems.
Portugal's Finance Ministry said Fitch's downgrade was "hard to comprehend" because the government's austerity measures are beginning to pay off and the country's banking system remains solid and well capitalized.
The ministry acknowledged that Portugal's financing costs have risen but it noted that the rising costs haven't impinged upon the country's ability to meet its debt obligations.
Nevertheless, some investors remain concerned about the country's chronically low growth prospects, heavy reliance on external markets for financing, and high deficit levels.
Earlier this month, Portugal reported its GDP for the third quarter had been revised down to a growth of 0.3% from 0.4%, highlighting the cloudy outlook for the economy as domestic demand slows.
Economic growth in Portugal's main trading partners in Europe boosted exports but high unemployment and higher taxes at home dented imports.
Prime Minister Jose Socrates said the country is on track to reduce its budget deficit and continues to prioritize the consolidation of its budget as a means of achieving long-term sustainable economic growth.
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