Portugal downgraded to junk status

Portugal’s credit rating has been downgraded to junk status with a negative outlook by Fitch Ratings.

Fitch cited a large fiscal imbalance, high indebtedness across all sectors and an adverse macroeconomic outlook as grounds for downgrading Portugal from BBB- to BB+ at the end of its fourth-quarter review.

Less than six months ago, Fitch indicated that Portugal’s pace of economic reform was accelerating and that a €78 billion (£69 billion) bailout from the European Union and International Monetary Fund (IMF) had enhanced its medium-term outlook.

However, the second review of Portugal by the European Commission, European Central Bank and the IMF earlier this month concluded that Portugal is likely to be hit by a stronger than expected recession in 2012.

A worsened European outlook has led to a revision of Portugal’s GDP growth expectations. In July Fitch predicted a 2% contraction in 2012 but has since revised this figure to 3% contraction.

In a statement today, Fitch commended the government’s commitment to a deficit reduction plan and predicts the 5.9% deficit reduction target for 2011 will be met.

Fitch has also indicated that it expects the 4.5% deficit target for 2012 to be met but warns that the risk of slippage – based on “macroeconomic outturns” or “insufficient expenditure control” – is large.

General government debt is predicted to peak at 116% of GDP by the end of 2013.

Despite the July bailout, Fitch’s report argues that Portugal’s banking system – one of the most heavily indebted in the world – still requires further recapitalisation and emergency liquidity measures.