Moody’s downgrades Portugal’s bond ratings by two notches

Moody’s Investors Service on Tuesday downgraded Portugal’s government bond ratings by two notches, citing the likelihood of further deterioration in the nation’s finances and weak economic growth prospects.

The firm cut the ratings to A1 from Aa2 and said the outlook was now stable, with the upside and downside risks evenly balanced. Moody’s had placed the ratings on review for possible downgrade May 5.

Moody’s said it expected the Portuguese government’s debt metrics to continue to deteriorate for at least two to three more years.

The debt-to-gross-domestic-product and debt-to-revenues ratios are likely to reach 90% and 210%, respectively, before eventually stabilizing if the budget is brought under control.

“Moody’s also remains concerned about the economy’s medium-term growth potential,” said Anthony Thomas, senior analyst in Moody’s sovereign risk group, who added that Portugal’s government is projected to remain highly indebted for the foreseeable future.

The two other major rating firms — Standard & Poor’s and Fitch Ratings — have also lowered their ratings on Portugal in recent months. In late April, S&P cut the country’s rating to A-minus, and Fitch downgraded Portugal to AA-minus in March.

“Recently there have been slightly more encouraging signs that perhaps people are becoming more confident about peripheral euro-zone economies generally,” said Ben May, European economist at Capital Economics Ltd. in London.

“This highlights the uncertainties and can potentially have a damaging impact on sentiment,” he said, in reference to the downgrade.

Capital Economics expects the Portuguese economy to grow 0.5% this year, but May warned that there’s a chance the nation may fall back into recession as the full extent of the fiscal measures the government is taking comes through.

“The likes of Portugal have to go through a prolonged period of fiscal tightening in order to get their finances in order,” May said. “There’s a long way to go yet.”

The sovereign-debt crisis in Greece shook confidence in several euro-zone economies, such as Spain and Portugal, which have high levels of government debt. In the wake of financial market turmoil and ratings downgrades, the government in Lisbon has taken measures to lower its deficit.

Lesova writes for MarketWatch.com/McClatchy.