Europe markets rattled as Fitch lowers Portugal's credit rating

Stock markets tumble as debt worries prompt agency to cut rating to AA minus

Portugal sent shivers through European markets yesterday after fears about its ability to repay its debts prompted the ratings agency Fitch to downgrade its credit rating.

Fitch – one of the "big three" agencies, along with Standard & Poor's and Moody's – cut Portugal by one notch from AA to AA minus, with a negative outlook. Douglas Renwick, associate director of Fitch's sovereign debt team, said the decision was motivated by concerns about Portugal's economic prospects, which he said were weaker than those of the other EU member states. It put Portugal's already shaky public finances under pressure. Mr Renwick added: "The downgrade reflects significant budgetary under-performance in 2009. The general government deficit in that year was 9.3 per cent of GDP, versus 6.5 per cent of GDP forecast by Fitch last September. This has significantly increased the scale of the fiscal challenge to stabilise and reduce debt over the medium term."

Stock markets across Europe took a tumble immediately after Fitch's announcement, although they recovered ground later on. The euro also suffered, falling by 1.34 cents, or 1 per cent, against the dollar to $1.3362.

The single currency fell against the pound as well, losing half a penny to 89.325p. That was because the downgrade heightened concerns that the debt troubles that have plagued Greece are spreading to the eurozone's other weakened economies.

Portugal holds an unwelcome place among the so-called "Pigs" – an unflattering acronym used to group together heavily indebted European countries with weak economies. Also included are Ireland, Greece and Spain, although some argue that Italy should be added, which would make the acronym "Piigs".

Analysts said the downgrade had been coming, and that Fitch's rating was mid-way between those of its rivals. They do not believe that either S&P or Moody's will necessarily follow suit, and the spreads Portugal pays on its debt above Germany's Bunds actually eased.

Fitch warned that the Portuguese government would nonetheless need to implement "sizeable consolidation measures from next year, on top of the reversal of the fiscal stimulus this year, in order to meet the 3 per cent of GDP deficit target by 2013. If this is achieved, public debt/GDP will peak at around 90 per cent in 2013".

RBC Capital Markets said it rated Portugal as the second most risky industrialised OECD economy behind Greece. "In terms of the current stock and flow of debt, Portugal does not rank that badly – significantly better than Japan, the UK, the US and Greece," the bank said. "It scores less well, however, on its ability to service its debt. Portugal's economic strength is acceptable but it is particularly weak in terms of its market response score, indicating a perceived lack of credibility in its fiscal plans."

RBC said that, after Portugal, the UK was ranked the highest risk in its Heat Map. It said: "[Britain's] current debt position is seen as very worrying, with only Japan in a worse state. Debt servicing is also becoming a concern. Economic strength is acceptable but the market response is unfavourable."

Britain still enjoys an AAA rating, but many fear this will be downgraded as a result of the spiralling public- sector deficit. Fitch has raised concerns about Britain while Standard & Poor's has the prized AAA rating on a negative outlook.