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July 14, 2010

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Moody's slashes Portugal's rating

MOODY'S cut Portugal's credit rating yesterday, casting fresh doubt on the country's ability to weather its debt crisis.

Moody's Investors Service downgraded Portugal's government bond ratings to A1 from Aa2. The move by the ratings agency deepens Portugal's financial woes because foreign lenders will likely demand higher interest for the risk of lending it money.

Portugal's woes are part of a government debt crisis that has engulfed the eurozone and weighed on the shared currency. The cuts in Portugal's rating by international agencies in recent months have stoked market concerns that the crisis, which led Greece to the brink of bankruptcy and a bailout, could spread to other financially troubled countries in the eurozone.

The government debt agency is scheduled to auction at least 1 billion euros (US$1.25 billion) in bonds today.

Moody's said feeble growth and climbing debt levels over the past two years will continue to sap Portugal's fiscal strength.

Portugal's budget deficit ballooned to 9.4 percent of GDP last year, the fourth highest rate in the eurozone. The economy contracted 2.7 percent last year amid the global downturn.

The center-left Socialist government has enacted an austerity package to slash the debt but has struggled to find new sources of growth.

Moody's said it expects the government's debt situation "to continue to deteriorate for at least another two to three years" before stabilizing.

The government has set a deficit target of 5.1 percent for 2011, but financial markets are worried the austerity plan could choke a recovery.

The financial crisis, and the government's measures to address it, have been blamed for pushing the jobless rate to almost 11 percent, one of the highest in the eurozone.

However, Moody's said its outlook for Portugal remains "stable." "Moody's believes that they will stabilize at levels that are commensurate with a strong A rating," the agency said.




 

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