Rating agency Fitch downgraded Portugal's rating to junk status, citing large fiscal imbalances, high debts and the risks to its EU-mandated austerity program from a worsening economic outlook.
Fitch cut Portugal to BB+ from BBB-, which is still one notch higher than Moody's rating of Ba2. S&P still rates Portugal investment grade.
Fitch said a deepening recession makes it much more challenging for the government to cut the budget deficit but it still expects fiscal goals to be met both this year and next.
However, the risk of slippage either from worse macroeconomic outturns or insufficient expenditure controls, is large, Fitch said.
Fitch said the state-owned enterprise sector is another key source of fiscal risk and has caused a number of upward revisions to the country's debt and budget deficit figures this year. The government has said there was an unexpected fiscal shortfall of about 3 billion Euros this year.
Given these downside risks, Fitch sees a significant likelihood that further consolidation measures will be needed through the course of 2012, Fitch said.
Meantime in neighbouring Spain the leader-in-waiting will resist international pressure to reveal detailed economic plans while he searches for financial skeletons in the closet and courts the opposition, according to party officials.
Conservative Mariano Rajoy, known as a cautious public administrator campaigned on promises to restore confidence on financial markets and he is expected to slash spending and bring in business-friendly economic reforms.
But analysts and officials from his party said he would not be rushed despite the intensity of the Euro zone debt crisis that has forced three countries to take international bailouts.
“You can’t put together a package of measures until you know exactly what kind of public spending effort you’re confronting,” Miguel Arias Cañete, the PP campaign coordinator and tipped for foreign minister, said on Onda Cero radio.
Everyone from Fitch debt rating agency to German Chancellor Angela Merkel has urged Rajoy to take rapid steps, but under Spanish law he will not formally take office until mid-December.
On the campaign trail Rajoy pledged to protect the national health and education systems even while slashing spending. But many Spaniards believe the welfare state will be vulnerable now that the election has been won.
The president of Catalonia, a wealthy and highly indebted region in north-eastern Spain, on Tuesday announced pay cuts for state workers and tax hikes. Catalonia’s high public deficit is considered a liability for the central government as it tries to hit ambitious deficit reduction targets.