debt rating of Portugal was demoted one level by Fitch Ratings

debt rating of Portugal was demoted one level by Fitch Ratings, which said the economy faces a "deteriorating" prospects as the government struggles to contain the euro zone's fourth largest budget deficit.

The long-term issuer foreign and local currency default rating was reduced to A +, the fifth highest level, from AA-, Fitch said in a statement. The outlook is negative. March 24, Fitch cut the rating by one step to AA-. The company said in a separate report, the risk of the European Union will have to rescue other euro member states after rescue of Ireland and Greece.

"The downgrade reflects a further slow reduction in the current account deficit and financing environment much more difficult for the Portuguese government and the banks prior to joining Fitch rating and negative outlook assigned on March 24, 2010, and as impaired short-term economic prospects, "the rating company said.

The Portuguese government plans to cut salaries of state workers and raise taxes to convince investors that it can reduce the budget gap, after the Greek debt crisis led to an increase in borrowing costs for high-income countries deficit. Ireland became the second euro country to find the rescue and the first to request assistance from the European Financial Stability Fund last month.

Yield spread

The difference in performance between 10-year bonds Portuguese and German bonds, a benchmark in Europe, the euro hit a record was 483 basis points on November 11. The spread was 364 basis points yesterday.

The rating downgrade by Fitch announced it is "difficult to understand" at the present time in 2011 in Portugal, the budget has been approved and its banking system is "solid and strong," said the Finance Ministry yesterday in a comment sent by e-mail.

"The white structural budgetary adjustment in 2011 - equivalent to almost four per cent of GDP - will be difficult, especially if, as Fitch expects the economy goes into recession next year," said the rating company's statement yesterday.

The government is taking the necessary measures so that they do not have to ask for help, Finance Minister Fernando Teixeira dos Santos said on 15 December. Portugal faces no bond repayments until April and has completed sales this year of the debt. Borrowing costs increased by Dec. 15 sale of 500 million euros (655 million U.S. dollars) of bonds in three months.

Finance market

"The government has shown it can maintain access to market financing, albeit at a high cost during the crisis," Fitch said. "The current ratings are based on the Portuguese government to maintain market access and not assume that it is external financial support under a program of the EU and the IMF."

Moody's Investors Service said on December 21 Portugal bond rating may be downgraded one or two levels on the basis of that budget cuts will worsen the country "weak" economic growth. Moody's downgraded the credit rating two steps to A1 Portugal on 13 July.

Standard & Poor's said Nov. 30 it may lower the country's rating, after being cut to A-from A + in April. S & P yesterday affirmed the AAA rating in France.

Credit rating companies also review other countries. Moody's said Dec. 15 it may cut the rating Aa1 from Spain and on 16 December said that Greece placed bonds Ba1 ratings on review for possible downgrade. Ireland's credit rating was reduced five levels by Moody's on 17 December.

'Systemic' Crisis

Fitch said in a separate report yesterday that the crisis is "systemic" and is concerned about the viability of the single currency as a whole.

"While the economic fundamentals of the euro area credit are stronger than current levels of risk assessment indicates, Fitch believes that the crisis is systemic to the extent that it reflects concerns about the viability of the euro, as well as country-specific vulnerabilities, "the ratings company said in London.

Portugal has exports, such as paper and wood products to support economic growth, as spending cuts. The budget envisages a GDP growth of 0.2 percent in 2011, slower than previously estimated 1.3 percent this year. Portugal's economic growth has averaged less than 1 percent annually over the past decade, one of the weakest growth rates in Europe.

"The evidence that the economy was on a path of sustainable recovery, supported by adherence to the government's objectives of fiscal consolidation could lead to a revision in the rating outlook to stable," Fitch said yesterday.

Portugal 2011 budget includes the largest cuts in spending over three decades. In September, the government said it would cut the wage bill by 5 percent for public sector workers earning more than 1,500 euros a month, hiring freeze and increase value added tax by 2 percentage points to 23 percent to help to reduce the government deficit amounted to 9.3 percent of gross domestic product in 2009.

The country recorded the largest deficit of the 16-nation euro zone last year after Ireland, Greece and Spain. It aims to reduce its budget deficit to 7.3 percent of GDP this year, 4.6 percent in 2011, and reach the EU limit of 3 percent in 2012.