The ratings downgrade will make it more expensive for the Portuguese to borrow money International ratings agency Moody's has downgraded Portugal's sovereign debt rating, citing the country's need to cut debt and its poor growth prospects.
Meanwhile Portugal's main opposition party has announced it will oppose the government's austerity plans.The prime minister has warned the country could face a bail-out.
"The consequence of a political crisis would worsen the risks for our economy and lead to intervention," he said.
Portugal is burdened with high levels of debt, and is struggling to avoid an international bail-out similar to those of Greece and the Republic of Ireland.
Political deadlock
The government of Prime Minister, Jose Socrates, unveiled the latest in a series of austerity measures last Friday.
The plans, which included cuts to health and welfare budgets, were meant to reassure investors and fellow European Union members that it can meet its debt obligations without the need for outside help.
However, the austerity package has met with fierce opposition, and the prime minister has warned that if the measures fail to win support, his country may be forced into a bail-out.
The main opposition party has now decided to formally oppose the plans which could lead to political deadlock.
This could bring down the current minority government forcing a general election.
"I have been fighting to avoid this scenario for six months," Mr Socrates told Portuguese television.
Negative outlook
Ratings agency Moody's has decided to downgrade Portugal's sovereign debt rating by two notches from A1 to A3.
"The cost of market funding is likely to remain high until the deficit has been reduced to a sustainable level and the prospects for economic growth have improved," it said in a statement.
The downgrade will make it more expensive for Portugal to raise money on the international money markets.
Moody's has also given a negative outlook on the new rating, which means its rating could be downgraded further.
This indicates that Moody's is unsure that the Portuguese government will be able to deliver on the reforms it has recently announced.
Standard and Poor's, another ratings agency, recently announced that it is also reviewing Portugal's debt rating.
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