Moody's Investor Service, the international ratings agency, lowered Portugal's sovereign debt rating on Tuesday by two grades to A1 from Aa2.

The agency said the country's growth is still weak and that its debt continues to climb. It said it expected Portugal's debt troubles to continue for the next two to three years and called on the government to enact further austerity measures in the 2011 budget.

The euro dropped to a one-week low of $1.2533. The wider market reaction was muted, however, as Moody's is only playing catch-up with rival agency Standard & Poor's, which still rates Portuguese debt two notches lower at A-.

"It doesn't have the same impact as it would if the likes of S&P were to downgrade, given the move only brings [Moody's] in line," Sean Maloney, a rate strategist at Nomura, told Reuters news agency.

City Index analyst Joshua Raymond agreed, telling the AFP wire service, "I do not think this took a lot of investors by surprise this morning, which is why the market reaction for Europe as a whole has not been too severe thus far."

"What the cut does do, however, is reaffirm the fragility of credit ratings for those countries with high debts and any cut in credit ratings is likely to be seen as a vote of no confidence," he added.

Author: Holly Fox (AFP/AP/Reuters)
Editor: Chuck Penfold