Moody's ratings agency has downgraded Portugal's long-term government bond by four ratings to Ba2 from Baa1 and assigned a negative outlook, citing a growing risk that the country will require a second bail-out.
Moody's has also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2.
Moody's cited 'the growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition' as a driver for the downgrade.
It also said that it had concerns that Portugal would not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the EU and IMF.
This was due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system, Moody's said.
Moody's said that it noted 'that European policymakers have grown increasingly concerned about the shifting of Greek debt held by private investors onto the balance sheets of the official sector'.
Although Portugal rating is better than Greece's, Moody's said, 'the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private-sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well.'
A further downgrade could be triggered by a significant slippage in the execution of the government's fiscal consolidation programme, a further downward revision of the country's economic growth prospects or an increased risk that further support requires private sector participation.
Moody's is the first of the so-called 'Big Three' ratings agencies to put Portugal's credit in junk status.
Standard & Poor's and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range.