Fitch on Thursday cut Portugal's credit ratings by two notches, saying risks to the country's financing rose after parliament failed to pass fiscal austerity measures and the prime minister resigned.
The ratings agency warned further downgrades are likely in the next three to six months, especially in the absence of a timely and credible program of financial support from the International Monetary Fund and European Union.
So far Portugal has managed to finance itself in capital markets, but government borrowing costs spiked on Thursday -- with 10-year yields reaching an all-time high of 7.9 percent.
That makes it challenging for the government to refinance upcoming bond redemptions of 4.3 billion euros and 4.9 billion euros in April and June, respectively. Chances Portugal will seek a bailout have increased, according to Fitch.
Given the lack of improvement in financing conditions, Fitch no longer assumes Portugal can maintain affordable market access this year under its baseline scenario, Fitch's analyst Douglas Renwick said in a statement.
The agency cut Portugal's long-term foreign- and local-currency issuer ratings to A-minus from A-plus. Short-term issuer ratings were cut to F2 from F1. All the new notes were placed on rating watch negative. Portugal's country ceiling was affirmed at AAA.
Prime Minister Jose Socrates quit on Wednesday after parliament rejected new austerity measures designed for Portugal to avoid seeking IMF/EU financial assistance, as euro members Greece and Ireland did last year.
Despite stepping down, Socrates on Thursday attended a two-day euro-zone summit in Brussels, where he remained adamantly opposed to requesting aid. He intends to hold that line at least until a new Portuguese government is formed, probably in about two months.
The likelihood Portugal will require multilateral financial support in the short term has risen significantly, given its impaired ability to retain affordable market access, Fitch said.
With its move, Fitch caught up with Moody's, which last week cut Portugal's ratings two notches to A3, equivalent to Fitch's A-minus.
They are only catching up with other rating agencies, and with all ratings still being investment grade I don't think there'll be much impact in the bond market, said Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto.
But the timing looks strange and their focus on the political issues seems a bit of an exaggeration and premature. The key context is the European summit, which apparently is dominated by the Portuguese crisis, so they at least could have waited for the summit to end, Garcia added.
Among the big three rating agencies, Standard & Poor's currently assigns the highest rating to Portugal -- A-minus -- but the agency has already said it is considering downgrading the country if growth prospects weaken or if private creditors become subordinated to public creditors in a possible financial aid program.
Further rating downgrades from Moody's are also likely, as the agency said last week Portugal would need to meet the stricter fiscal targets set by the government for 2011 in order to keep its rating.
(Additional reporting by Andrei Khalip in Lisbon; editing by Andrew Hay)