Portuguese credit rating downgraded 2 notches to A- by Standard & Poor’s

Portuguese debt downgraded by Standard & Poor’s

LONDON — Standard & Poor’s has downgraded its credit rating on Portugal amid mounting concerns about the country’s ability to get a handle on its debt load.

In a statement Tuesday, the agency says that the two notch downgrade to A- reflects its view of “the amplified risks Portugal faces.”

Portugal has been widely considered as the most likely to suffer if Greece’s debt crisis spreads to other countries.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

LISBON, Portugal (AP) — Debt-burdened Portugal came under increased market pressure Tuesday, as borrowing costs surged and stocks fell sharply amid fears that a debt crisis in Greece would spread to other European countries with weak government finances.

The market drops deepened the government’s woes as it faced a strike by public transport workers over a pay freeze designed to help curb state spending.

Portugal is trying to avoid the fate of Greece, which is facing a full-fledged debt crisis as markets fear Athens will have to restructure its heavy debt load. Soaring interest rates demanded by bond investors have forced Athens to appeal to other eurozone countries and the International Monetary Fund for €45 billion bailout loans.

The interest rate gap, or spread, between Portuguese and benchmark German 10-year bonds trading on financial markets — a key indicator — rose 32 basis points, or 0.32 percentage points, to hit 5.51 percentage points. It was the widest gap since the shared euro currency, which Portugal and 15 other nations use, came into circulation.

The Lisbon Stock Market’s benchmark PSI-20 index, meanwhile, plunged 3.4 percent by early afternoon.

Portugal is seen as one of the euro zone’s most vulnerable countries after Greece, where authorities are still negotiating the terms of the eurozone and IMF bailout package, with Germany demanding strict cutbacks as a condition of the loans. The delay in approving the Greek bailout, however, is making markets nervous about Greece’s ability to pay debt coming due next month.

The European Union is trying to ward off a broader debt crisis and avoid the Greek woes from hitting Portugal and others including Spain, weakened by collapse of a real-estate bubble, and Italy, which carries a high level of debt.

Carlos Andrade, chief economist at Portugal’s Banco Espirito Santo, said Portugal was not showing signs of defaulting but was a victim of speculation driven by Greece’s difficulties.

“The spreads don’t reflect the country’s economic fundamentals. They reflect market speculation,” Andrade said. “It’s a problem of contagion.”

He noted Portugal has already raised €4.5 billion from bond issues which saw demand outstrip the number of bonds on offer.

Still, Portugal’s weak growth prospects have sharpened investor concerns about Lisbon’s ability to meet future debt payments. The economy depends on tourism as a mainstay and lacks other solid sources of future growth that would bolster government finances.

Its government debt load is smaller than that of Greece, but economists point to high levels of private sector debt.

Portugal’s budget deficit stood at 9.4 percent of gross domestic product last year. It public debt will be 86 percent of GDP this year, still lower than Greece’s 124 percent but still a huge burden which the government expects to peak at 90.1 percent 2012 before falling back.

The government predicts growth of 0.7 percent this year and 0.9 percent in 2011. But the European Commission has expressed concern those growth forecasts could be too optimistic.

As part of its effort to alleviate the country’s debt load the center-left Socialist government has introduced a pay freeze for civil servants and staff at publicly owned companies.

The austerity plan has triggered outrage from trade unions, and public transport workers went on strike Tuesday.

The walkout stopped trains, buses and ferries, forcing many commuters to take their cars into the capital, Lisbon, and the second-largest city Porto where police reported road congestion.

Minister without portfolio Pedro Silva Pereira said it was wrong to demand pay hikes when the difficult economic times demanded sacrifices.

“The hardships have to be shared by all,” he said.