PORTUGAL - Moody's has downgraded Portuguese debt to 'junk' status on fears it will need a second bail out just months after it received €78bn ($112bn).
Portuguese long-term government bond ratings have been downgraded to Ba2 from Baa1, or ‘junk status' and Moody's assigned the country a ‘negative outlook'.
The credit rating agency has moved after warning there were concerns surrounding the money Portuguese banks have lent to Greece and when this will be repaid.
Moody's said in a statement there was a "growing risk that Portugal will require a second round of official financing before it can return to the private market and the increasing possibility that private sector creditor participation will be required as a pre-condition."
Moody's also fears Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the EU and IMF "due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system".
In April 2011, Moody's cut the government debt rating by one notch to Baa1 and placed it on review for further possible downgrade. It also downgraded the government's short-term debt rating to Prime-2 from Prime-1.
Shortly after, in May, the Portuguese government received €78bn, in a bail out agreement with the EU and IMF.
BlueBay Asset Management senior portfolio manager and co-head of investment grade Mark Dowding said the cut was warranted.
He added: "Portuguese fiscal dynamics are stretched and long term fiscal sustainability is further hindered by low prospective rates of economic growth in an uncompetitive and highly regulated economy. We believe that other rating agencies are likely to cut Portugal below investment grade in the near to intermediate future and this will lead to its departure from Euro sovereign bond indices.
"Portugal is unlikely to be able to return to financial markets in the next several years and is likely to remain dependent on EFSF / ESM / IMF financing for the foreseeable future."
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