Moody's slashed Portugal's credit rating by two notches to A1, citing a deterioration of the country's debt ratios and weak growth prospects, the ratings agency said Tuesday.
The action concludes a Moody's review that started on May 5, and the outlook is now stable, the agency said.
Investors are watching euro-zone economies to see how they address their debt issues as a crisis of confidence has hit the area ever since it emerged that Greece misrepresented its official statistics to make its debt look smaller than it actually was.
Portugal's debt-to-GDP and debt-to-revenues ratios have risen rapidly in the past two years, Anthony Thomas, vice president and senior analyst in Moody's Sovereign Risk Group, said in the statement.
"This deterioration came about due to the government's anti-crisis measures and the operation of the budget's automatic stabilizers, such as higher unemployment benefits, when the economy went into recession," Thomas added.
The euro fell after the downgrade, while Portuguese stocks turned negative.
The spread between Portuguese and German 10-year government bonds widened to 290 points.