WRAPUP 1-Moody's may downgrade Greece, Portugal on negative

* Moody's puts Greece on review, a week after Fitch cut

* Portugal outlk to negative over structural probs, debt

* Spreads widen to early-September high for Greece

By Ingrid Melander and Andrei Khalip

ATHENS/LISBON, Oct 29 (Reuters) - Moody's cut its outlook for euro zone member Portugal's debt ratings on Thursday and put Greece on review for a possible cut, driving up the premium the two Mediterranean countries pay to borrow money.

Moody's cited sharp fiscal worsening in Greece, where the budget deficit is set to surge to 12.5 percent of GDP. Fellow agency Fitch cut the country's ratings last week and analysts expect Moody's will follow suit after the review. [ID:nLT259401]

The agency also cut its outlook on Portugal's Aa2 ratings to negative from stable, pointing to rising debt and a lack of structural reforms [ID:LT387819].

"For me, this is all part and parcel of a scenario of deficit pressure which is putting all sovereign ratings under pressure, especially for the higher deficit and higher debt issuers," said Padhraic Garvey, strategist at ING.

Ratings guide how much it costs governments to issue bonds and other debt and are a reflection of the risks facing the country's finances and broader economy.

Several euro zone states have already seen their ratings cut, which over time will add to pressure on governments to rein in the huge deficits and debt burdens built up to stimulate economies after the financial crisis erupted last year.

The 10-year Greek bond GR10YT=RR yielded as much as 145.5 basis points over equivalent-maturity Bunds EU10YT=RR compared with 136 basis points in late European hours the previous trading day, according to Reuters charts. That was the widest since early September.

The equivalent Portuguese spread edged out by two basis points to 57 basis points.

SKY-ROCKETING GREEK DEFICIT

Analysts said Moody's decision to put Greece under review came as no surprise after the new socialist government said last week the budget deficit would reach 12.5 percent of GDP this year, more than double than the previous, conservative government had predicted.

"The deterioration of the fiscal position raises serious questions about the sustainability of Greek public finances and the problem will be compounded by a less favourable global economic environment going forward," said Arnaud Mares, a Senior Vice President in Moody's Sovereign Risk Group.

"The likelihood that Greece can 'grow' out of its government indebtedness post-crisis as it did pre-crisis is minimal."

Moody's said it intends to complete its review within 3 months and urged Greece to cut public expenditure and increase tax revenues to stabilise state finances.

"The deficit revisions were poison for the image of Greece's budget management," said Sebastian Wanke at DekaBank. "Greece should move as quickly as possible to consolidate its budget."

The combination of fiscal troubles, a ballooning public debt and slow structural reforms have long kept Greece the lowest rated country in the euro zone.

Fitch Ratings last week downgraded Greece's debt to A- with a negative outlook, the first major agency to chastise the country since the Socialists came to power on Oct. 4.

But Standard and Poor's sees no pressure on its A- rating for Greece, an analyst at the rating agency said on Thursday.

LACK OF REFORMS IN PORTUGAL

The cut on Portugal's outlook followed a similar move by Fitch in early September. Analysts said it was a further alert to the need for the government to tidy up the finances.

"Moody's will monitor the situation closely in the coming months to see whether meaningful reforms are finally taken to tackle the underlying problems in the economy and the public finances," it said in a statement.

"With the government having lost its majority in the recent national election, such an effort seems unlikely and the rating could be placed on review for downgrade."

Portugal's second-term Socialist government was sworn in this week after losing their absolute majority in parliament, which may complicate the passage of some bills.

"It is imperative that the government shows that they are serious about bringing the fiscal accounts to a sustainable path," Diego Iscaro, Global Insight in London.

Ruling in a minority could be a challenge as Western Europe's poorest country needs to swiftly address problems including rising debt and unemployment, a growing budget deficit and a widening wealth gap with European partners.

Portugal had its budget gap under the EU 3 percent limit for two years in 2007 and 2008, but this year's deficit is likely to reach as much as 5.9 percent following stimulus measures.

For analysts' comments on the move click on [ID:nLT256754]

(Writing by Ingrid Melander; Additional reporting by Harry Papachristou, Renee Maltezou, Lefteris Papadimas; Editing by Patrick Graham)