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

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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.


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.

However, he also suggested some reforms have not been as effective as hoped, including efforts to cut the number of public employees.

“In our opinion, Portugal faces increasingly difficult challenges as it tries to boost competitiveness and lift persistently low growth,” said Cullinan.

“This, together with a heavy general government debt burden, leads us to believe that Portugal is unlikely to make the necessary structural improvements to remain in the AA peer group.”

The government has announced 2.2 billion euros in spending to boost the struggling economy, which it predicts will contract 0.8 percent in 2009, compared with estimated growth of 0.3 percent last year.

The budget deficit is seen rising to 3.9 percent of gross domestic product this year, sharply up from 2.2 percent in 2008, which was the lowest in several decades.

The total debt burden is expected to rise to 69.7 percent of GDP, up from 65.9 percent last year, according to governments forecasts, according to government forecasts.

Uncertainty about Portugal’s ability at future economic reforms may be further tested after general elections this year, which could eradicate, or reduce, the ruling Socialists majority in parliament.

Some economists have said the Socialists have not taken sufficient advantage of the large majority they currently have to carry out more, and deeper, economic reforms of labour markets and the public sector.

“We expect that the outcome of the 2009 general election may be less conducive to the implementation of structural reforms if, for instance, the next government has to operate with a reduced majority,” S&P said.

Additional reporting by Andrei Khalip, Shrikesh Laxmidas and Sergio Goncalves Reporting by Axel Bugge; editing by Patrick Graham