Moody's Investors Service cut Portugal's credit rating to below investment grade on concern the southern European country will need to follow Greece in seeking a second international bailout.
The long-term government bond ratings were lowered to Ba2, or junk, from Baa1, and the outlook is negative. Discussions to involve private investors in a new rescue plan for Greece make it more likely that the European Union will require the same preconditions in the case of Portugal, Moody's said.
"That's very significant because not only does it affect current investors, but it is likely to discourage new private-sector lending going forward, and therefore reduce the likelihood that a country like Portugal will be able to regain access to the capital markets at a sustainable cost," said Anthony Thomas, a senior analyst at Moody's.
Portugal is the second euro country rated non-investment grade by Moody's, joining Greece, after winning a €78 billion ($136 billion) international bailout in May.
European finance ministers last week authorised an €8.7 billion loan payout to Greece by mid-July, basing a second three-year bailout package on talks to corral banks into maintaining their Greek debt holdings.
Europe is inching towards a goal of getting banks to roll over €30 billion of Greek bonds, instead of opening a hole for the official lenders to fill.
French banks, with the biggest holdings in Greece, worked out a rollover formula that is serving as an example elsewhere, with two options for bondholders to replace their maturing securities. At the same time, Standard & Poor's said this week the plan may temporarily place Greece in "selective default" if implemented.
Portugal this year joined Ireland and Greece in turning to the EU and the International Monetary Fund (IMF) for emergency funding after their budget deficits ballooned. Moody's yesterday said it also based its credit rating cut on risks that Portugal won't be able to fully achieve its deficit-reduction target.
"It's a reminder that the sovereign debt crisis does not end with Greece and risks remain with other nations in addition to Greece," said Gary Pollack, at Deutsche Bank's Private Wealth Management unit in New York.
Moody's said the first driver of its decision was "the increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter".
Portugal said the decision by Moody's ignores the effects of an extraordinary income-tax charge announced last week.
There is a "broad political consensus" backing the execution of the measures that were agreed upon with the EU, European Central Bank and International Monetary Fund as part of the aid programme, the Portuguese Finance Ministry said yesterday.