S&P cuts Portugal credit rating to just above junk

Standard & Poor's cut its credit rating on Portugal by one notch on Tuesday to just above junk status, its second downgrade in less than a week as the debt-ridden country grapples with a political crisis.

S&P cited the prospects of unsecured government debt being subordinated to future loans from the European Stability Mechanism fund, which it said Portugal was likely to resort to.

"Given Portugal's weakened capital market access and its likely considerable external financing needs in the next few years, it is our view that Portugal will likely access the EFSF (the current euro rescue fund) and thereafter the ESM," the agency said.

S&P's BBB-minus rating, the lowest investment grade, is now far below Moody's A3 and Fitch Ratings' A-minus.

After last Thursday's two-notch downgrade, the agency warned it was likely to cut Portugal further, and analysts say the cut was mostly priced in. Still, bond yields, already at euro lifetime highs, rose further after the move, hitting 8.18% for the benchmark 10-year maturity.

S&P removed Portugal from its creditwatch negative list, but kept a negative outlook on the country, which means a new downgrade is possible within months.

"The negative outlook reflects our view that the macroeconomic environment could weaken beyond our current expectations and that a political impasse could undermine the effective implementation of Portugal's adjustment program, leading to non-negligible policy slippages," it said.

Prime Mininster Jose Socrates resigned last Wednesday after opposition-dominated parliament rejected his minority government's austerity plan aimed to avoid a bailout. Most economists say a bailout is all but inevitable.