Moody’s slashes Portugal debt rating

Ratings agency Moody’s slashed Portugal’s government debt rating Tuesday, dealing a new blow to the eurozone country’s efforts to surmount its fiscal woes.

Moody’s lowered Portugal’s long-term government bond rating to A3 from A1, and gave it a negative outlook, citing concerns the government will not be able to balance its books amid “subdued growth prospects.”

It questioned whether the country can implement dramatic spending cuts, as it faces political headwinds and the possible need to aid struggling banks and government-backed firms.

Moody’s also cast doubt on Portugal’s ability to quickly become more productive, a step that would boost growth-spurring exports and raise government revenues.

“Since the external adjustment is likely to take several years to complete, concerns about the growth outlook are likely to persist for some time,” the bond rater said.

The move came as Portugal’s socialist minority government faced an onslaught after announcing a new austerity package Friday, raising fears it could fall.

Finance Minister Fernando Teixeira dos Santos said the government would sharply cut spending this year to bring down the government deficit to a market-palatable 4.6 percent, and then to the eurozone limit of three percent in 2012.

But Moody’s cast doubt on the government’s ability to implement that package, despite the support for it from the European Union and financial markets.

Instead of consolidating, Moody’s said government spending may need to expand further “in the event it has to provide financial support to the banking sector and government-related institutions, which are currently unable to access capital markets.”

Yet, Moody’s also said Lisbon would face challenging market conditions, including an expected rise in eurozone interest rates, that “will cause its debt affordability to weaken.”

Even with more support from the EU’s crisis stabilization fund, “questions would remain as to when the government would be able to re-access the capital markets and on what terms,” it said.

Ironically, the Moody’s downgrade would likely add to Lisbon’s difficulty to raise more financing.

Portugal’s debt stood at 143 billion euros ($200 billion) in 2010, or 83.3 percent of GDP, far above the EU limit of 60 percent.

Last week the country struggled to raise new funds, with investors driving yields on its 10-year bonds at 7.4 percent, a level widely considered unsustainable.

Given Lisbon’s conundrum — it might have to spend more to strengthen the economy, but lenders won’t support such action — Moody’s said a further downgrade of Lisbon’s rating was “likely” over the next one to two years.