Saturday, November 26, 2011

Portugal debt downgraded to Junk status

By Axel Bugge

LISBON (Reuters) - Fitch downgraded Portugal's credit rating to junk status on Thursday, citing large fiscal imbalances, high debts and the risks to its EU-mandated austerity program from a worsening economic outlook.

The ratings agency cut Portugal to BB+ from BBB-, which is still one notch higher than Moody's rating of Ba2. S&P still rates Portugal investment grade.

Fitch said a deepening recession makes it "much more challenging" for the government to cut the budget deficit but it still expects fiscal goals to be met both this year and next.

"However, the risk of slippage - either from worse macroeconomic outturns or insufficient expenditure controls - is large," Fitch said.

The challenging economic environment was clear in a Reuters poll on Thursday, where economists forecast Portugal's economy will contract by 2.9 percent next year, the deepest recession since the 1970s, and 1.6 percent this year, in line with the government's estimates. Portugal's 10-year bond prices plunged, sending yields surging more than 100 basis points to 13.85 percent -- the second highest level in the euro zone after on

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