Moody's warns of possible Portugal downgrade

[December 21, 2010]  MADRID (AP) -- Ratings agency Moody's warned Tuesday it could downgrade Portugal's public debt because of uncertain economic growth amid the nation's austerity drive, the high cost of borrowing on global markets and worries about the banking sector.

Portugal's sovereign credit rating could be lowered a notch or two from A1, Moody's Investors Service said in a statement. The agency last week slashed Ireland's rating by five notches and also warned Spain and Greece of possible downgrades.

Portugal is considered one of the weakest links in the 16-nation eurozone and fears it could follow Greece and Ireland in needing a bailout have pushed its borrowing costs sharply higher. It has been struggling with high debt and low growth since before the global financial crisis, but the government insists it can resolve its problems without help.

"In Moody's opinion, Portugal's solvency is not in question," said Anthony Thomas, Moody's lead analyst for Portugal, "But the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy's ability to withstand fiscal consolidation and private sector deleveraging mean its outlook may no longer be consistent with an A1 rating."

Many economists worry that eurozone nations' austerity efforts to cut deficits will also hurt growth and that banks' losses will weigh on public finances. After Greece and Ireland resorted to help from the EU and International Monetary Fund, Portugal and even much larger Spain -- both still tapping the open market for credit -- have caused borrowing rates to jump.

"The markets have remained open to the Portuguese government, but it is having to pay an elevated price, which if sustained will increase substantially its debt service costs over time," Thomas said.

Portugal has in the past borrowed huge amounts to finance welfare entitlements and private consumption. At the same time it has protected jobs through outdated labor laws that make it difficult to hire and fire workers while industry has broadly failed to modernize and is chronically uncompetitive.

The country's austerity package, due to be introduced Jan. 1, cuts the pay of public employees by an average 5 percent, trims welfare benefits and hikes income tax and sales tax. The government is also in talks with unions about labor reforms.

Economy Minister Jose Vieira da Silva has said the government wants to reduce the financial and bureaucratic burden on companies reducing their workforce. That may include paying less compensation to fired workers.

Last year's state budget deficit of 9.6 percent was below Greece's 15.4 percent but was still the fourth-highest in the eurozone.

Portugal recorded growth of 1.8 percent in the first nine months this year, and exports rose more than 15 percent.

[Associated Press; By ALAN CLENDENNING]

Carlo Piovano contributed from London.

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