S&P leaves Portugal's ratings just above junk bond status

Just a day after threatening to do so, Standard & Poor's cut Portugal's sovereign credit ratings to just above junk status, the second downgrade in four days, citing the likelihood of the country needing a bailout.

S&P lowered Portugal's long-term rating to BBB- from BBB, with the outlook remaining negative, suggesting the possibility of further cuts. It lowered the rating by two notches last week from A- in the wake of Prime Minister José Sócrates resignation after the Socialist had failing to win parliament's support for further deficit-reduction measures.

"Given Portugal's weakened capital market access and its likely considerable external financing needs in the next few years," S&P said it was "likely" that Portugal would avail itself of European emergency assistance for euro-zone countries in difficulties.

The rating agency said details of the arrangements for the European Stability Mechanism (ESM) agreed at a summit on March 24-25 indicate that sovereign debt restructuring is a potential pre-condition for tapping the permanent emergency fund that is due to take over from the European Financial Stability Facility (EFSF) set up in the wake of Greece's debt crisis in May of last year.

The ratings agency also said that unlike the scheme for the EFSF, senior unsecured government debt would be "subordinate" to ESM loans. "Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers," S&P said in a statement.

S&P said the outlook for the "relatively small and closed" Portuguese economy is "highly uncertain" and would depend considerably on the country's ability to increase the contribution of the export sector from its current level of 30 percent of GDP.

The agency also believes Portugal will fail to meet its targets for reducing its public deficit.