Portugal's credit downgrade rattles European markets

Portugal sent shivers through European markets yesterday after fears about its ability to repay its debts prompted the ratings agency Fitch to downgrade its credit rating.

Fitch - one of the "big three" agencies, along with Standard & Poor's and Moody's - cut Portugal by one notch from AA to AA minus, with a negative outlook.

Douglas Renwick, associate director of Fitch's sovereign debt team, said Portugal's economic prospects were weaker than those of the other EU member states.

It put Portugal's already shaky public finances under pressure.

Renwick added: "The downgrade reflects significant budgetary under-performance in 2009. The general government deficit in that year was 9.3 per cent of GDP, versus 6.5 per cent of GDP forecast by Fitch last September. This has significantly increased the scale of the fiscal challenge to stabilise and reduce debt over the medium term."

Stock markets across Europe took a tumble immediately after Fitch's announcement, although they recovered ground later.

The downgrade heightened concerns that the debt troubles that have plagued Greece are spreading to the eurozone's other weakened economies.

Portugal holds an unwelcome place among the so-called "Pigs" - an unflattering acronym used to group together heavily indebted European countries with weak economies.

Also included are Ireland, Greece and Spain, although some argue Italy should be added, which would make the acronym "Piigs".

Analysts said the downgrade had been coming, and that Fitch's rating was mid-way between those of its rivals.

They do not believe that either S&P or Moody's will necessarily follow suit, and the spreads Portugal pays on its debt above Germany's Bunds actually eased.

- INDEPENDENT