Fitch ratings agency today cut its rating on bailed-out Portugal by one notch to 'BB+' because of its high level of debt and weak economic outlook.
Fitch said the rating has a negative outlook, meaning it could be lowered again, citing Portugal's "large fiscal imbalances, high indebtedness across all sectors and adverse macroeconomic outlook" for the downgrade.
Fitch said Portugal - bailed out by the EU and International Monetary Fund to the tune of €78 billion - would see its economy shrink 3% next year, making government efforts to stabilise the public finances even more difficult.
It said the government's commitment to the reforms laid down in the bail-out programme was strong and it should meet this year's public deficit target of 5.9% of GDP.
The 2012 budget drawn up by the new conservative government elected in June "contains significant expenditure reductions, mainly on pensions and civil service pay.
"The budget is well-designed and is based on reasonable GDP assumptions. Fitch therefore expects the 4.5% deficit target for 2012 to be met," it said, while warning of large risks of slippage.
It said it expected total accumulated government debt to increase from 93.3% of GDP at the end of 2010 to around 110% at the end of this year and peak at around 116% by the end of 2013.
"The sovereign crisis poses significant risks to the banking system, which lends to one of the most indebted private sectors in Europe," Fitch said, waring that the banks will need fresh help from the European Central Bank.
The move is another blow to Portugal's efforts to restore its fiscal health after taking a €78 billion bail-out earlier this year to avoid bankruptcy. The government is cutting spending and hiking taxes - measures which triggered a general strike today.
