Moody's Investor Service warned on Tuesday it may downgrade Portugal's A1 rating by one or two notches after a review, citing weak growth prospects and high borrowing costs.
Lisbon has moved into the eye of the storm in Europe's debt crisis, with markets worried it will be next to take a bailout after Ireland and Greece. The Moody's announcement knocked the euro <EUR=> back a touch.
The ratings agency said it had concerns about Portugal's ability to access capital markets at a sustainable price and cited "uncertainties about Portugal's longer-term economic vitality, which will be exacerbated by the impact of fiscal austerity".
It also said that if the government sought an international bailout, such a step would have a positive impact on short-term uncertainties, but warned that at the same time it would raise concerns about medium-term access to private market funding.
"In Moody's opinion, Portugal's solvency is not in question," said Anthony Thomas, Moody's lead analyst for Portugal.
"But the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy's ability to withstand fiscal consolidation and private sector deleveraging mean its outlook may no longer be consistent with an A1 rating."
Moody's rating for Portugal two notches above that of Standard and Poor's, but a notch below that given to the country by Fitch.
The statement on Tuesday is the latest in a series of ratings-related jolts for the euro zone's most-indebted sovereigns after a five-notch cut by Moody's for Ireland last week.
The euro fell and German government bonds took some support from the news, but traders and analysts said there was little impact on Portuguese debt itself.
"Really the rating agencies are playing catch up with events and arguably they've got a long way to go to get back up to speed — they've been very much a lagging indicator throughout the crisis," said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.
"The euro has moved, so this might well translate into a more risk-negative tone but from a fixed-income perspective this was fully expected and looking at where spreads are, they indicate much lower ratings."
