Fitch Cuts Portugal’s Sovereign Debt Rating to Junk Level

Increasing debt levels and a foundering economy were the reasons Fitch Ratings cited on Thursday for cutting Portugal’s credit rating to junk. This was after Standard & Poor’s boosted Iceland’s credit rating outlook from negative to stable on Wednesday, as the country’s growth after its financial meltdown in 2008 brought it to the next step in its recovery.

Bloomberg reported that Fitch dropped Portugal to BBB- from BB+, with a negative outlook; the country’s 10-year bonds fell after the announcement, with yields increasing 16 basis points in early trading Wednesday. The Portuguese economy is expected to shrink by 3% next year, the only euro zone economy that the European Commission has predicted will shrink, besides Greece.

In making its ratings cut, Fitch said in a statement, “The country’s large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign’s credit profile is no longer consistent with an investment grade rating.” Iceland is already rated as junk by Fitch, but S&P ranks it at its lowest investment grade level of BBB-/A-3.

Moody’s had cut Portugal’s sovereign debt rating below investment grade in July, while S&P had cut the country’s rating twice in March.

Iceland’s cheerier outlook was accompanied by an S&P statement that said in part, “Iceland’s economy is recovering from the systemic failure of its three largest banks, and has returned to positive economic growth after two years of severe contraction. Significant headway has been made in restructuring the private-sector balance sheet and we expect the process to be mostly completed by mid-2012.” The ratings agency added that the higher outlook on the BBB- grade “balances our view of Iceland’s improved economic fundamentals with downside risks associated with capital controls being lifted in the next few years.”

Last week Iceland announced that it had recovered sufficiently to move on to the next step in relaxing capital controls that have been in place since its three largest banks defaulted on $85 billion in debt three years ago.