The United States ratings agency Moody’s has downgraded the Portuguese Republic’s credit rating to ‘junk status.’
It means that investors no longer believe in Portugal’s capacity to either meet its financial commitments and do not trust the European Union to come up with a viable solution to the sovereign debt crisis.
The Moody’s Investor Services downgraded the country’s credit rating by four notches from Baa1 to Ba2 or ‘junk’ status.
The rating was slashed because of worries that Portugal might need a second round of financing like Greece,
might have to reschedule its loans or might not be able to stick to tough austerity measures brokered with the IMF, EU and ECB.
It also refl ects investors choosing to dump the Euro in favour of the Swiss Franc, the US Dollar and the Pound.
The Ministry of Finance and Public Administration admitted that the downgrade revealed the vulnerabilities of the Portuguese economy within the context of the general European debt crisis.
In a statement, the ministry stated: “This downgrade confi rms that the presentation of a robust and systematic programme of macroeconomic adjustment is the only possible way for Portugal to change direction and recover credibility.”
The general outlines of structural and financial reforms were issued at the end of last week in a programme that the government says it will carry out in the next few weeks.
One measure is the end of the government’s participation or Golden Shares in leading Portuguese utility companies such as Galp, EDP and PT.
Another controversial measure on the table is that employees will have to give up 50% of their Christmas bonus above and beyond the minimum wage of €475.
The Government says that the ratings agency has failed to take into account the 80% cross-party support for the ‘Troika’ measures and memorandum signed in May.
It also points out that the June elections created a favourable parliamentary climate to push through the macroeconomic reforms agreed with the ‘Troika’.
The Moody’s decision also ignores the effects of an additional surtax on IRS (Income Tax) which was announced by the Government last week.
The Government’s strategy for the next two years is to push ahead with privatisation programmes in order to create the mechanisms for an open and competitive economy as well as diversifying financial channels within the Portuguese economy.