Portugal downgraded by Moody’s (MarketWatch) (16-03-2011)

LONDON — Moody’s Investors Service cut Portugal’s long-term debt rating by two notches to A3 from A1 on Wednesday, putting Moody’s rating in line with Standard & Poor’s. Both agencies have negative outlooks on the rating.

The move comes amid a clash over the Portuguese government’s effort to impose a further round of austerity measures, fueling long-running speculation that slow growth and rising borrowing costs will eventually leave Lisbon with little choice but to seek assistance from the European Union and International Monetary Fund.

According to Moody’s, the cut followed the expected difficulty in meeting government budget targets and the potential need for government support for the nation’s banking sector, which has become increasingly reliant on funding lifelines from the European Central Bank.

Portuguese institutions still have 42 billion euros ($58.7 billion) in funding from the ECB, down only 18% from the peak and still large given their relative size,

The Portuguese government has implemented tough austerity measures in an effort to bring down its budget deficit.

The additional austerity proposals equal 0.8% of gross domestic product, bringing the total fiscal squeeze for the current year to a level equal to 5.3% of GDP, hoping for further reducing Portugal’s deficit to 4.6% of GDP this year from 7.3% in 2010 and more than 9% in 2009.

Source: MarketWatch