Moody's cuts Portugal ratings outlook to negative

Ratings agency Moody's on Thursday cut the outlook on Portugal's Aa2 debt ratings to negative from stable citing structural economic challenges, rising debt and the government's slow tackling of the problems. The cut follows a similar move by Fitch Ratings in early September on Portugal's long-term foreign currency ratings. Moody's also put Greece's ratings on review for a possible downgrade on Thursday.
"Moody's cautions that subdued global growth following the crisis will lead to seriously adverse debt dynamics for Portugal," it said. "The problem seems to be that there is no spur to action for the government." The third major agency Standard & Poor's, cut Portugal's long-term rating to "A+" from "AA-" in January. The yield spread on 10-year Portuguese bonds with German bonds widened 2 basis points to 57.5 points after the cut. "I'd stress that this wasn't a surprise given the Fitch had already cut their outlook on Portugal's rating during first week of September," Diego Iscaro, Global Insight in London.
"It is imperative that the government shows that they are serious about bringing the fiscal accounts to a sustainable path." Ratings guide how much it costs governments to issue bonds and other debt and are a reflection of the risks facing the country's finances and broader economy. Portugal's Socialist prime minister won a second term last month and faces correcting the country's long-term economic weakness compared to its European partners as well as rising unemployment and a soaring budget gap in the global downturn.
"It's another alert, which points to the need to have a rather cautious economic policy from now on. Portugal has serious structural problems that it has to handle, especially our high external debt," Ana Paula Carvalho, Lisbon-based economist with BPI.
"Our yield spread is still rather low, but if you look at Greece or Ireland you see that the market can punish the spread quite strongly. If healthy economic policies to correct economic imbalances are not put into place, this spread will widen. "The government has to be careful with the signals coming from the fiscal and wage policies."