Moody’s cut Portugal’s credit standing to junk in the first such move by a ratings agency and warned of the country may well need a second round of rescue funds before it can return to capital markets.

Moody’s Investors Service slashed Portugal’s credit rating by four levels to Ba2, following Greece into junk territory below investment grade.

It cited heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilization targets set out in its loan agreement with the European Union and International Monetary Fund.

There also is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter, Moody’s said.

Portugal is receiving funds from a three-year, 78-billion-euro EU/IMF bailout programme and does not need to issue long-term debt in the market until 2013.

Portugal faces formidable challenges in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system, the agency said.

Out of the three major ratings agencies, Standard & Poor’s and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range.

Portugal’s new centre-right government said in a statement Moody’s did not take into account strong political backing for austerity after a June 5 election, and an extraordinary tax announced last week.

Unlike the previous minority Socialist government, the new ruling coalition has a comfortable majority in parliament.

It did acknowledge though that the four-notch ratings cut “shows the vulnerability of the country’s economy amid a debt crisis.”

It also reaffirmed commitment to deepening and speeding up austerity measures that the country vowed to implement under its 78-billion-euro bailout programme, saying a strong macroeconomic adjustment was “the only way to reverse the course and restore confidence” in Portugal.

Robert Tipp, chief investment strategist at Prudential Fixed Income in New Jersey, said the downgrade showed the European debt crisis was unlikely to stop at Greece, which looks set to receive a second bailout.

“Once Greece gets wrapped up, you move on to the next country, and in all likelihood that will be the shape of things to come over the next year or two in the euro zone until the long-term financing trajectory for these countries gets stabilized,” he said.

Reuters

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