Moody’s Investor Service has cut Portugal’s debt rating by two notches to A1, with a stable outlook.
It said the country’s growth prospects are weak and further austerity measures might be needed next year for it to reach tough fiscal targets.
At the same time Portugal’s central bank warned a new recession is possible and cut its growth estimate for next year from 0.8 percent to just 0.2 percent.
Portugal’s Finance Minister Fernando Teixeira dos Santos tried to put the best face on the change. He said: “The fact Moody’s made this rating downgrade now, but said there is a stable outlook, is a sign of confidence that the government’s policy of austerity measures will have a beneficial effect in the future.”
Rival agency Standard & Poor’s, cut Portugal’s rating by two notches to A- in April with a negative outlook.
In March, Fitch reduced its rating to AA- also with a negative outlook.
Portugal has higher than average levels of household debt and a relatively low savings rate.
The government has unveiled moves to slash spending, including public sector pay cuts.
The deficit is due to fall to 4.6 percent in 2011 from 9.4 percent in 2009.