Fitch Cuts Portugal's Sovereign Debt Rating

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Portugal's flagShares in the U.S. and Europe were broadly lower Wednesday after Fitch Ratings cut Portugal's sovereign debt rating a notch to AA- and warned of further possible downgrades if the country doesn't drastically curtail its mounting budget deficits.

The move comes as eurozone leaders haggle over Germany and the International Monetary Fund's roles in a financial rescue package for Greece. Portugal, like Greece, is one of the so-called PIIGS of Europe, shorthand for the nations of Portugal, Ireland, Italy, Greece and Spain, all of which are struggling with mounting fiscal woes.

"A sizable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal's creditworthiness," says Douglas Renwick, associate director in Fitch's Sovereign team, in a statement. "Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than [its European Union] peers, which will put pressure on its public finances over the medium term."

More Belt Tightening Needed

Fitch lowered Portugal's sovereign debt rating one level to AA-, from AA, because its government deficit rose to 9.3% of gross domestic product last year, far greater than the 6.5% Fitch had modeled in September. The euro, already at a 10-month low versus the dollar, fell sharply on the rating cut, dipping as far as $1.3333 early Wednesday.

Furthermore, Fitch says its outlook is negative, meaning it could move to cut the country's rating again unless its government changes course. The ratings agency cites "concern about the potential impact of the global economic crisis on Portugal's economy and public finances over the medium term, given the country's existing structural weaknesses and high indebtedness across all sectors of the economy."

Portugal, already facing the same type of deep budget cuts seen in Greece, will have to tighten its belt even further to stave off another rating reduction. Fitch says the nation will need to implement "sizable" measures in order to meet the eurozone deficit target of 3% of GDP by 2013 as "further fiscal and/or economic underperformance in 2010 and 2011 could lead to another downgrade."
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