Fitch ratings agency said on Thursday it was cutting its rating on bailed-out Portugal by one notch to 'BB+' because of its high level of debt and weak economic outlook.
Fitch said the rating has a negative outlook, meaning it could be lowered again, citing Portugal's "large fiscal imbalances, high indebtedness across all sectors and adverse macroeconomic outlook" for the downgrade.
Fitch said Portugal -- bailed out by the EU and International Monetary Fund to the tune of 78 billion euros -- would see its economy shrink 3.0 percent next year, making government efforts to stabilise the public finances even more difficult.
It said the government's commitment to the reforms laid down in the bailout programme was strong and it should meet this year's public deficit target of 5.9 percent of Gross Domestic Product.
The 2012 budget drawn up by the new conservative government elected in June "contains significant expenditure reductions, mainly on pensions and civil service pay.
"The budget is well-designed and is based on reasonable GDP assumptions.
Fitch therefore expects the 4.5 percent deficit target for 2012 to be met," it said, while warning of large risks of slippage.
It said it expected total accumulated government debt to increase from 93.3 percent of GDP at end-2010 to around 110 percent at end-2011 and peak at around 116 percent at end-2013.
"The sovereign crisis poses significant risks to the banking system, which lends to one of the most indebted private sectors in Europe," Fitch said, waring that the banks will need fresh help from the European Central Bank.
Portugal was bailed out after fellow eurozone strugglers Greece and Ireland needed rescues in 2010 to save them from default, with the debt crisis since spreading steadily to snare Italy and Spain.© ANP/AFP