Portugal’s Debt Rating Lowered by Fitch

(Bloomberg) -- Portugal’s credit grade was cut by Fitch Ratings, underscoring growing concern that Europe’s weakest economies will struggle to meet their debt commitments as finances deteriorate.

The rating was lowered one step to AA- with a “negative” outlook, Fitch said in a statement today. The euro extended its decline, weakening 1.1 percent to $1.3355 as of 10:32 a.m. in London. Portuguese bonds fell, with the yield on the 10-year note rising 5 basis points to 4.33 percent. Portugal’s PSI-20 Index of stocks dropped 2 percent.

Euro-region governments in the so-called peripheral nations, including Greece, Ireland, Italy and Spain, are seeking to narrow budget deficits that have exceeded the European Union’s 3 percent limit by as much as four times. Portugal’s gross domestic product per capita and trend growth are “significantly below” what is typical for a AA country, reducing its ability to tolerate the global economic downturn, Fitch said.

“A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,” Douglas Renwick, associate director at Fitch, wrote in the report from London. “Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than 15 European Union peers, which will put pressure on its public finances over the medium term.”

Deficit Plans

Portugal is planning to cut its budget deficit to 8.3 percent of gross domestic product this year from last year’s 9.3 percent. The government predicted economic growth in 2010 of 0.7 percent after a decline last year depressed tax revenue.

“Portugal’s downgrade underlines the problems in the European Union,” said Paul Robinson, a currency strategist at Barclays Capital in London. “People are worried about the fiscal situation in the southern European economies and the prospects for those economies.”

The cost of protecting against losses on Portugal sovereign debt rose to the highest in almost a month, according to CMA DataVision prices for credit-default swaps. Five-year contracts insuring $10 million of bonds increased $6,000 a year to $140,000. Swaps rise as perceptions of credit quality worsen.

Today’s downgrade for Portugal is the first by Fitch since 1998, and puts it one level below the Aa2 rating assigned to it by Moody’s Investors Service. The last time Portugal’s credit was lowered was on Jan. 21, 2009, when Standard & Poor’s cut it to A+, two steps lower than Moody’s and one step below the level Fitch gave it today.