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Fitch slashes Portugal rating, Lisbon says it is bad news

Fitch Ratings on Thursday slashed its Portugal sovereign rating by two notches and said it could be downgraded further after parliament voted down the government’s economic policy.

Fitch, one of the top three ratings agencies, said it cut Portugal’s ratings to ‘A-‘ from ‘A+’ and put them on a negative review, a move Lisbon described as “bad news.”

Portuguese Prime Minister Jose Socrates stepped down Wednesday after parliament rejected his latest austerity plan, stoking fears that Lisbon would have to seek an EU-IMF bailout to stabilise its finances, after Greece and Ireland needed help last year.

The austerity plan was aimed at avoiding the need for such a bailout by ensuring that Lisbon could meet its debt repayment obligations.

Fitch said the fall of the government increased the risk level.

“The downgrade reflects increased risks to policy implementation and fiscal financing in light of the … parliament’s failure to pass fiscal consolidation measures and the resignation of the prime minister,” it said.

In December, Fitch downgraded Portugal to ‘A+’ with a Negative Outlook, warning then that additional measures would be needed if the government were to bring the public deficit down to the target of 4.6 percent of GDP.

“The failure to pass such measures … and the ensuing policy uncertainty has weakened the credibility of Portugal’s fiscal and structural reform programme,” it said Thursday.

“It has therefore significantly increased the chances of Portugal requiring multilateral support in the near term, given its impaired ability to retain affordable market access.”

The negative review “indicates a heightened probability of a downgrade over the next three to six months.

“In the absence of a timely and credible economic and financial support programme agreed with the IMF and EU, Portugal’s sovereign rating would likely be downgraded, possibly by more than one notch,” Fitch added.

In Lisbon, Portuguese employment state secretary Fernando Medina said the downgrade “was bad news for Portugal, for companies, for families and the financial system.

“Less than 24 hours after an irresponsible decision on the part of the opposition, we see the consequences.”

A ratings downgrade usually means the affected country has to pay higher rates of interest to investors as it seeks to raise fresh funds.

Rates on Portuguese debt, however, are already well above an unsustainable seven percent for longer-dated bonds and so the rating downgrade will makes its debt problems even more difficult to resolve.

The interim government in Lisbon insisted Thursday that it would do everything possible to avoid a bailout, saying the conditions for any such rescue would make such a step against the national interest.

“The government will fight and continue to do all it can to avoid resorting to external aid which would have very serious consequences for the economy,” cabinet spokesman Pedro Silva Pereira said.