Portugal debt given junk status amid 'formidable challenges'

Citing concerns that Portugal will not be able to meet the "formidable challenges" in cutting its spending, the rating agency said there is a risk the country will need another lifeline by eurozone governments after the €78 billion agreed just in May this year.

The new Portuguese government retorted that the junk status does not reflect the effects of an extraordinary income tax agreed last week and the broad political support for austerity measures which are "the only way to reverse the course and restore confidence" in Portugal.

Under the terms of a bailout by the EU-IMF bailout, Portugal must cut its budget deficit to 5.9 percent of GDP this year, from over 9 percent in 2010. Measures similar to the ones in Greece are envisaged: privatising state-owned banks, energy companies and the TAP Portugal airline and reducing a series of social benefits, such as compensation for fired workers.

Moody's also expressed concerns that private investors would be drawn into a second bailout for Portugal, as is the case with the second lifeline for Greece.

The discussion about private involvement was "significant not only because it increases the economic risks facing current investors but also because it may discourage new private sector lending going forward," it said.

A meeting of Europe's top bankers is scheduled in Paris on Wednesday to thrash out the terms under which participation in Greek bonds sales would be carried out. Eurozone governments are aiming for €30 billion to be covered in this way.

The Paris meeting will be hosted by the Institute of International Finance - a Washington-based organisation grouping over 400 financial institutions.

The IIF is already co-ordinating other technical talks and started work on this dossier last Monday, at a Rome gathering, an IIF spokesman said.