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Fitch will re-evaluate Portuguese debt before year’s end

Fitch ratings agency said Thursday it would wait until the end of the year before re-evaluating the long-term debt of Portugal, considered one of the weaker links in the eurozone debt chain.

Their assessment would take into account the results of the budget reforms and sale of state assets agreed in May as part of the 78-billion-euro ($112-billion) debt rescue plan it agreed with the European Union and International Monetary Fund, Fitch said.

But the review would also take account of the improved lending terms from the European Financial Stability Facility announced at last week’s eurozone summit, it added.

In April, Fitch Ratings slashed Portugal’s credit rating by three notches to BBB-, judging that it was less likely to win outside support given the country was heading for an election.

Despite having cleared that obstacle, the agency made it clear that the pressure was still on Portugal in the report on the country it published Thursday.

“The country’s ratings remain under downward pressure given its fragile public and external debt dynamics, uncertain long-term growth prospects and adverse macroeconomic headwinds in 2011-12,” Fitch said.

“Portugal will suffer two years of real GDP contraction (2.0 percent in both 2011 and 2012 according to Fitch’s forecast) as its economic imbalances unwind,” it said.

“However, Portugal’s EUR78bn EU-IMF financial assistance programme has alleviated short-term liquidity concerns following the loss of sovereign market access and should accelerate the pace of structural economic reform.”

Nevertheless, if Portugal’s economy and public finances were not on a sustainable path come 2013, Fitch warned it would take into account the precedent set by the second bail-out of Greece, which draws in private sector involvement.

Last Friday, Fitch said it would consider debt-stricken Greece to be in limited default because the new programme agreed by eurozone leaders demands that private sector creditors lose money on their holdings of Greek government bonds.

For Portugal, the ratings agency said the likelihood of further structural reforms, combined with an improvement in Portugal’s export structure over recent years, enhanced the country’s “medium-term economic outlook”.

“Nevertheless, the burden of private sector and foreign indebtedness also weigh on the prospects for sustained economic recovery, essential for restoring confidence in the solvency of the Portuguese state,” Fitch said.

In early July, rival ratings agency Moody’s sparked anger from European countries when it downgraded Portugal’s debt to junk status.

The European Commission protested that the timing was “questionable” and based on “absolutely hypothetical scenarios” that bore no relation to the country’s economic programme.

Portugal is the third country, after Greece and Ireland, to have sought help from the EU and the IMF.

In return for the EU-IMF package, Portugal’s new centre-right Social Democrat party (PSD) has undertaken to slash spending and raise taxes to stabilise the public finances.