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Moody’s downgrade Portuguese debt to junk status

Portugal’s debt has been downgraded to junk status by credit ratings agency Moody’s today.

Moody’s downgraded Portugal’s long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook, concluding a review of the country’s ratings that began on April 5.

A rating of Baa1 was implemented at the start of the review in April following a €26 billion (£22.6 billion) loan approved by the International Monetary Fund in May.

The decision was based on the agency’s assertion that there is a “growing risk” Portugal “will require a second round of official financing before it can return to the private market” and that it will be unable to meet the debt stabilisation and deficit reduction targets.

Moody’s has expressed concern over Portugal’s ability to meet a deficit reduction target of 3 per cent by 2013 – down from 9.1 per cent last year.

Citing policymaker proposals that “private sector participation should be a precondition for additional rounds of official lending to Greece”, Moody’s says such proposals could also become a precondition for lending to Portgual.

“This may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms”, the agency said in a statement today.

While Moody’s acknowledges that political uncertainties within Portugal have been largely resolved, the agency indicates a further downgrade could be triggered.

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