LONDON – Rating agency Fitch warned Portugal on Monday it could demote the nation's debt deeper into junk territory if last week's rejection of austerity measures by its constitutional court disrupts its fiscal repair plans.
Fitch currently rates Portugal BB+ with a negative outlook which the firm says historically ends up in a downgrade in around 50 percent of cases.
Lisbon's constitutional court on Friday rejected four out of nine contested austerity measures in this year's budget, cuts that are linked to the country's 78 billion euro ($102 billion)bailout from the European Union and International Monetary Fund.
Fitch said the uncertainty caused by the 'no' vote was a potential setback for the country's adjustment program and had put additional pressure on its sovereign rating.
"Political uncertainty or material slippage in fiscal consolidation could put negative pressure on the ratings. Weaker-than-expected GDP growth, leading to a significantly higher peak in public debt would also be a trigger for negative rating action," Fitch said in a statement.
The main concern was a ruling that threw doubt over the government's plans to cut public sector wages.
"In blocking a plan to suspend a monthly salary payment to state workers, the ruling could be interpreted as a saying that all public spending cuts that affect civil servants are unconstitutional."
"If that interpretation is correct, the ruling represents a setback to future fiscal adjustment efforts in Portugal. This is a greater concern than its immediate impact," Fitch said.
The European Central Bank has already amended its rules to ensure that banks can still use Portuguese bonds as collateral to borrow cheaply, so any further downgrade should have limited immediate impact.
Sub-investment grade or 'junk' status starts at BB+. There are nine further notches down before a bond or other type of rated asset reaches default status.
($1 = 0.7682 euros)
(Reporting by Marc Jones; Editing by Ruth Pitchford)