UPDATE 2-S&P cuts Portugal credit rating, euro takes knock

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By Axel Bugge

LISBON, Jan 21 (Reuters) - Standard & Poor's cut Portugal's credit rating on Wednesday, the third country downgrade in the euro zone in a week, helping to push the single currency to session lows against the dollar.

The ratings agency warned that the deepening global financial crisis had made Portuguese economic vulnerabilities, such as insufficient structural reforms, deteriorating public finances and persistently low growth, harder to tackle.

"The weakness of the Portuguese economy is clear, clearer still in the current environment," Standard & Poor's credit analyst Trevor Cullinan said on a conference call.

Ratings agency Standard & Poor's, which has already cut its ratings for Greece and Spain and put Ireland on negative watch, cut Portugal's long-term rating to "A+" from "AA-".

Analysts said Wednesday's move only increased the chances of Ireland being the next for a downgrade, which makes it harder and more expensive for countries to sell their debt.

The euro EUR= hit a low of $1.2826 after the news before recovering.

"Given the chronic current account and budget deficits, the high ratio of public debt to GDP and productivity problems, all Portuguese people should be very worried about the future of the country," said Filipe Garcia, an economist with Informacao de Mercados Financeiros Consultants in Lisbon.

"It is not possible to sustain this situation forever. The rating downgrade today is just a warning," he added.

Portugal's economy has consistently underperformed Europe as a whole in the last few years, suffering from surging public deficits which had only just been brought under control when the credit crunch hit last year.

GOVERNMENT BLAMES CRISIS

The finance ministry said in a statement that the downgrade was caused by the "global crisis, without precedents, that we are going through."

It said that had it not been for the crisis, Portugal would have had a higher rating due to its efforts at reforms and to reduce the budget deficit in recent years.

S&P's Cullinan said economic reforms had been impressive in recent years. They have included efforts to streamline the bloated public sector and reduce public pensions.