"The downgrade reflects an even slower reduction in the current account deficit and a much more difficult financing environment for the Portuguese government and banks than incorporated into Fitch's previous rating (in March), as well as a deteriorating near-term economic outlook," Fitch said in a statement.
Fitch's downgrade follows a warning earlier this week from rival Moody's Investor Services that it may cut its A1 rating on Portugal by a notch or two because of uncertain economic growth, the high cost of borrowing on global markets and worries about the banking sector.
Fitch's reasoning is very similar and is likely to stoke renewed speculation that Portugal could well be the next country using the euro in need of financial help from its partners in the European Union and the International Monetary Fund—Greece and Ireland have already suffered the ignominy of being bailed out.
The agency said the Portuguese government would likely meet its target of reducing its budget deficit to 7.3 percent of national income this year, but voiced concerns that this is heavily dependent on one-time measures, which don't make a dent on the long-term state of the public finances.
As a result, Fitch said the government will find it "extremely challenging" getting the budget into shape, especially if, as the agency expects, the economy falls into recession next year. The Portuguese government aims to reduce the budget deficit to 3 percent of GDP by 2012 and to just 2 percent of 2013, which would be extremely difficult if the eurozone's smallest economy starts to contract again—in effect, lower growth means lower tax receipts and higher social spending, hardly conducive to budgetary health.
"Failure to meet its 2011 budget headline and structural deficit targets would erode confidence in the medium-term sustainability of public finances that underpins Portugal's current sovereign ratings," Fitch said.