Moody's Downgrades Portugal Debt

Moody's credit rating agency downgraded Portugal's debt by two notches Tuesday, to A1 from Aa2, citing weak growth and climbing debt levels over the past two years that will continue to sap the country's fiscal strength. Moody's expects conditions will continue to deteriorate for at least another two to three years before stabilizing.

Many believed it was just a matter of time before Europe's sovereign debt woes spread beyond Greece. Portugal, along with Spain, Ireland and to a lesser extent Italy, is one of the more financially troubled countries of the eurozone. This is not the first cut by an international agency of Portugal's sovereign debt. Portugal's budget deficit ballooned to 9.4% of GDP last year, as the economy contracted 2.7%. But the Portuguese government plans to cut its budget deficit to 8.3% of GDP this year. Moody's expects growth of between 0.5% and 1% in 2010.

The downgrade by Moody's Investors Service casts fresh doubt on Portugal's ability to weather its debt crisis. As the economy weakens, lenders will likely demand higher interest rates for the risk of loaning it money.

The government debt agency is scheduled to auction at least €1 billion ($1.25 billion) in bonds on Wednesday. So far this year, Portugal has experienced no liquidity problems and no difficulty raising money on international markets, the Associated Press reported.

Global stock markets, which sold off because of the Greek debt crisis, have only recently begun to recover. But Portugal's financial ordeal may put a new strain on the eurozone economies. The euro fell 0.4% to $1.2531 following the downgrade. But after a smooth treasury bill auction by Greece, European shares pared earlier losses.